X Corporation (which has no-debt) has operating income of $1500, 100 shares outstanding and a current market price of $236 per share. It is currently paying no dividends, but it forecasts a short term return on invested capital of 18 percent. Its weighted average cost of capital is 12 percent. Assuming that it's paying no dividends, how long is the expected return on invested capital of 18 percent expected to continue before it returns to 12 percent?
The measurement of the business profit coming from the business operation is known as the operating income. The cots are also deducted from the revenue to get the same.
Answer and Explanation:
No debt funds.
- Current Market capitalisation = $ 236 per share * 100 shares = $ 23,600
- Operating income of $ 1500
- Earnings per share = Earnings / No. of shares outstanding
$ 1500 / 100 = $ 15 per share
- Return = 18%
Therefore invested capital = earnings per share/return on capital
= $ 15 / 18% = $ 83.33 per share
Total invested capital = $ 83.33 per share * 100 shares = $ 8,333.33
The price of the share when investor rate of return will decline from 18% to 12% :
Price = ($236 / 18%)*12% = $ 157.33
At price $ 157.33 per share the investor will be getting a return of 12%
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from Accounting 101: Financial AccountingChapter 8 / Lesson 5