Question

Page 5 FOR QUESTIONS 59-78: HERE ARE THE ASSUMPTIONS AND RELEVANT DATA. PLEASE ATTENTION TO THEM; ONE MISSED ASSUMPTION MAY AFFECT MANY ANSWERS: MPTIONS AND RELEVANT DATA. PLEASE PAY CAREFUL >YEAR 1: • SALES REVENUE: $10,000,000 • COST OF GOODS SOLD: $5,000,000 NOTE: COST OF GOODS SOLD STAYS CONSTANT IS THE SAME AMOUNT FOR YEARS 1. 2. AND • CORE OPERATING EXPENSES: $3.3 MILLION NOTE DO NOT INCLUDE THE FOLLOWING EXPENSES IN THE OPERATING EXPENSES, BUT INSTEAD INCLUDE THE FOLLOWING THREE EXPENSES AFTER CALCULATING OPERATING INCOME • DEPRECIATION: THE BASE IS $3,000,000, DEPRECIATION IS OVER 5 YEARS AND IS TAKEN ON A STRAIGHT LINE BASIS; • INTEREST EXPENSE: $250,000; • TAX EXPENSE: $250,000 NOTE: DEPRECIATION INTEREST AND TAX EXPENSE REMAIN UNCHANGED FROM YEAR 1 >>FOR YEARS 2 & 3: . SALES REVENUE: USING YEAR 1 AS THE BASE YEAR, APPLY A COMPOUNDED ANNUAL GROWTH RATE OF 4.5% • COST OF GOODS SOLD: SEE NOTE: THIS REMAINS $5 MILLION FOR YEARS 2 AND 3. CORE OPERATING EXPENSES: USING YEAR 1 AS THE BASE YEAR, APPLY A COMPOUNDED ANNUAL GROWTH RATE OF 3%. AGAIN: DEPRECIATION, INTEREST, AND TAXES REMAIN UNCHANGED FROM YEAR 1 >>>FOR ALL YEARS: ASSUME 10 MILLION SHARES OF COMMON STOCK OUTSTANDING AND ASSUME THE FOLLOWING STOCK PRICE PER SHARE: YEAR 1: $6 YEAR 2: $7 YEAR 3: $10 59. YEAR 1 GROSS MARGIN: $ 60. YEAR 1OPERATING INCOME: $ 62. YEAR 1 NET INCOME: $_ 61. YEAR 1 DEPRECIATION EXPENSE: $ 64. YEAR 2 OPERATING INCOME: $ 63. YEAR 2 SALES REVENUE: $ 66. YEAR 2 TAXES: $ 65. YEAR 2 INTEREST EXPENSE: $_ 68. YEAR 3 SALES REVENUE: $ 67. YEAR 2 NET INCOME: $__ 70. YEAR 3 INTEREST EXPENSE: $ 69. YEAR 3 OPERATING INCOME: $ 72. YEAR 3 NET INCOME: $ 71. YEAR 3 TAXES: $_ 74. EPS FOR YEAR 2: $ 73. EARNINGS PER SHARE (EPS) FOR YEAR 1 :$ 76. PE RATIO(PE) FOR YEAR 1: 75. EPS FOR YEAR 3:$ 78. PE FOR YEAR 3: 77. PE FOR YEAR 2:

Answer 1

Hello,

		(Figures in $)	Calculations
59	Year 1 Gross Margin
	Sales	1,00,00,000	a
	Less : Cost of goods sold	50,00,000	b
	Gross Margin	50,00,000	c=a-b
60	Year 1 Operating Income
	Gross Margin	50,00,000	c
	Less : Core operating expenses	33,00,000	d
	Operating income	17,00,000	e = c-d
61	Year 1 Depreciation expenses
	Base	30,00,000	f1
	Useful life	5 years	g1
	Depreciation (SL method)	6,00,000	f = f1/g1
62	Year 1 Net income
	Operating income	17,00,000	e
	Less : Depreciation	6,00,000	f
	Less : Interest	2,50,000	g
	Less : Tax expenses	2,50,000	h
	Net income	6,00,000	i
63	Year 2 Sales Revenue
	Compounded annual growth rate	4.5%	j
	Year 1 sales	1,00,00,000	a
	Year 2 Sales Revenue	1,04,50,000	k = a* (1+j)
64	Year 2 Operating Income
	Core operating expenses Year 1	33,00,000	d
	Compounded annual growth rate	4.5%	l
	Core operating expenses Year 2	34,48,500	m = d * (1+l)
	Sales revenue Year 2	1,04,50,000	k
	Cost of goods sold Year 2	50,00,000	n
	Core operating expenses Year 2	34,48,500	m
	Year 2 Operating Income	20,01,500	o = k-n-m
65	Year 2 interest expenses	2,50,000	p
66	Year 2 Taxes	2,50,000	q
67	Year 2 Net Income
	Year 2 Operating Income	20,01,500	o
	Less : interest expenses, taxes, depreciation	9,01,500	r = p+q+f
	Year 2 Net Income	11,00,000	s = o-r
68	Year 3 sales revenue
	Compounded annual growth rate	4.5%	j
	Year 2 sales	1,04,50,000	k
	Year 3 Sales Revenue	1,09,20,250	t = k* (1+j)
69	Year 3 operating income
	Core operating expenses Year 2	34,48,500	m
	Compounded annual growth rate	4.5%	l
	Core operating expenses Year 3	36,03,683	u = m * (1+l)
	Sales revenue Year 3	1,09,20,250	t
	Cost of goods sold Year 3	50,00,000	n
	Core operating expenses Year 3	36,03,683	u
	Year 3 operating income	23,16,568	v = t-n-u
70	Year 3 interest expenses	2,50,000	p
71	Year 3 Taxes	2,50,000	q
72	Year 3 Net income
	Year 3 Operating Income	23,16,568	v
	Less : interest expenses, taxes, depreciation	11,00,000	r3 = p+q+f
	Year 3 Net Income	12,16,568	s3 = v-r3
73	EPS for Year 1
	Net income Year 1	6,00,000	i
	Number of common stock shares	1,00,00,000	w
	EPS for Year 1	0.06	x = i/w
74	EPS for Year 2
	Net income Year 2	11,00,000	s
	Number of common stock shares	1,00,00,000	w
	EPS for Year 2	0.11	y = s/w
75	EPS for Year 3
	Net income Year 3	12,16,568	s3
	Number of common stock shares	1,00,00,000	w
	EPS for Year 3	0.12	z = s3/w
76	PE ratio Year 1
	Stock Price Year 1	6	sp1
	EPS for Year 1	0.06	x
	PE ratio Year 1	100	sp1/x
77	PE ratio Year 2
	Stock Price Year 2	7	sp2
	EPS for Year 2	0.11	y
	PE ratio Year 2	64	sp2/y
78	PE ratio Year 3
	Stock Price Year 3	10	sp3
	EPS for Year 3	0.12	z
	PE ratio Year 3	82	sp3/z

Hope this helps. Thanks and have a great day!