Expert Answers

1. The Bolten Corporation had earnings per share of $2.60 in 2008, and book value per share at the end of 2007 (beginning of 2008) was $13.
Sustainable growth model
• a. What was the firm’s return on equity (book value) in 2008?
• b. If the firm pays out $0.78 in dividends per share, what is the retention ratio? How much will book value per share be at the end of 2008? Add retained earnings per share for 2008 to book value per share at the beginning of 2008

2. Using Formula above, compute RF (risk–free rate). The real rate of return is 3 percent and the expected rate of inflation is 5 percent.

Problem 5: Constant growth dividend model

3. Assume D1 = $1.60, Ke = 13 percent, g = 8 percent. Using above, for the constant growth dividend valuation model, compute P0.

4: Constant growth dividend model
• a. If D1 and Ke remain the same, but g goes up to 9 percent, what will the new stock price be? Briefly explain the reason for the change.
• b. If D1 and g retain their original value ($1.60 and 8 percent), but Ke goes up to 15 percent, what will the new stock price be? Briefly explain the reason for the change.

5. If inventory increases by $100,000, what will be the impact on the current ratio, the quick ratio, and the net–working–capital–to–total–assets ratio? Show the ratios before and after the changes.
6: General ratio analysis
Given the following financial data, compute:
General ratio analysis
• a. Return on equity.
• b. Quick ratio.
• c. Long–term debt to equity.
• d. Fixed–charge coverage.