How is this answer computed ?Assume that Saxton’s Net Income is a Perpetuity
How is this answer computed ?Assume that Saxton’s Net Income is a Perpetuity. Then using the firm’s Return
On Equity as its Required Rate of Return, determine the value of the Saxton Company based upon its Net Income.
Return On Equity (ROE) (%) = Net Income / Total Owners Equity-$200,000/ ($1,600,000-$600,000) =20%-
Income Statement
For the Year Ended December 31, 2009
Sales (all on credit) …………………………………………………………… $ 4,000,000
Cost of Goods Sold…………………………………………………………………3,000,000
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Gross Profit………………………………………………………………………….$ 1,000,000
Selling and Administrative Expenses……………………………………. 450,000
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Operating Profit ……………………………………………………………………$ 550,000
Interest Expense…………………………………………………………………… 50,000
Extraordinary Loss…………………………………………………………………. 200,000
Earnings Before Taxes……………………………………………………………$ 300,000
Income Taxes (33%)………………………………………………………………. 100,000
Net Income…………………………………………………………………………….$ 200,000
SAXTON COMPANY
Balance Sheet
As of December 31, 2009
Assets
Cash…………………………………………………………………………… $ 30,000
Accounts Receivable………………………………………………….. 350,000
Marketable Securities ……………………………………………….. 50,000
Inventory……………………………………………………………………. 370,000
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Total Current Assets……………………………………………………. $ 800,000
Net Plant and Equipment…………………………………………….. 800,000
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Total Assets………………………………………………………………….$ 1,600,000
Liabilities and Stockholders’ Equity
Accounts Payable…………………………………………………………..$ 50,000
Notes Payable……………………………………………………………….. 250,000
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Total Current Liabilities…………………………………………………..$ 300,000
Long Term Liabilities………………………………………………………… 300,000
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Total Liabilities ………………………………………………………………..$ 600,000
Common Stock…………………………………………………………………. 400,000
Retained Earnings…………………………………………………………….. 600,000
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Total Stockholders’ Equity……………………………………………….$ 1,000,000
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