Stock price per share Estimat ed growth rate Required rate of return (R) Blue Ribband Motors Corp. $1.24 $0.39 $20.10 7.54% 15% Bon Voyage Marine, Inc. $1.55 $0.47 $16.85 9.75% 17% Nautilus Marine Engines -$0.25* $0.67 $31.60 8.06% 13% 2 * Nautilus Marine Engine’s negative EPS was the result of a non-recurring accounting write-off last year. Without the write-off, EPS for the company would have been $1.93.
Dan is considering whether to issue coupon-bearing bonds or zero-coupon
bonds. The YTM (yield to maturity) on either bond issue will be 5.5%. The
coupon bond would have a 5.5% coupon rate and coupon is paid semi-
annually. Assume the company’s tax rate is 21%, and interest is
compounded every 6 months.
a. How many of the coupon bonds must East Coast Yachts issue to
raise the $45 million? In 30 years, what will be the principal
repayment due if East Coast Yachts issues the coupon bonds?
b. How do the answers in (a) change if the coupon rate is set at 4%
instead of 5.5%?
c. How do the answers in (a) change if only using zeroes (i.e., zero-
coupon bonds) as the source of financing?
d. Would you recommend a zero coupon issue or a regular coupon
issue, why?
4. Last year, Ragan Engines had an EPS of $3.65 and paid a dividend to
Carrington and Genevieve of $195,000 each. Each of them has 125,000
shares. The company also has an estimated earnings growth rate of
10.3%. Larissa tells Dan that a required return for Ragan Engines of 13%
is appropriate. Assuming Ragan Engines continues its current growth rate,
what is its estimated stock price?
5. Dan has examined the company’s financial statements and those of its
competitors. Although Ragan Engines currently has a technological
advantage, Dan’s research indicates that Ragan’s competitors are
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investigating other methods to improve efficiency. Given this, Dan
believes that Ragan’s technological advantage will last only for the next 5
years. After that period, the company’s growth will likely slow to the
industry average. Additionally, Dan believes that the required return of
13% is too low. He believes that the industry average required return is
more appropriate. Under Dan’s assumptions, what is the estimated stock
price?