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Rio National Corp. is a U.S.-based company and the largest competitor in its ind

Rio National Corp. is a U.S.-based company and the largest competitor in its industry.Tables 13.5–13.8 present financial statements and related information for the company.Table 13.9 presents relevant industry and market data.The portfolio manager of a large mutual fund comments to one of the fund’s analysts,Katrina Shaar: “We have been considering the purchase of Rio National Corp. equityshares, so I would like you to analyze the value of the company. To begin, based on2009 2008Cash $ 13.00 $ 5.87Accounts receivable 30.00 27.00Inventory 209.06 189.06Current assets $252.06 $221.93Gross fixed assets 474.47 409.47Accumulated depreciation (154.17) (90.00)Net fixed assets 320.30 319.47Total assets $572.36 $541.40Accounts payable $ 25.05 $ 26.05Notes payable 0.00 0.00Current portion of long-term debt 0.00 0.00Current liabilities $ 25.05 $ 26.05Long-term debt 240.00 245.00Total liabilities $265.05 $271.05Common stock 160.00 150.00Retained earnings 147.31 120.35Total shareholders’ equity $307.31 $270.35Total liabilities and shareholders’ equity $572.36 $541.40TABLE 13.5Rio National Corp.Summary year-endbalance sheets(U.S. $ millions) Part FOUR Security AnalysisNote 1: Rio National had $75 million in capital expendituresduring the year.Note 2: A piece of equipment that was originally purchased for$10 million was sold for $7 million at year-end, when ithad a net book value of $3 million. Equipment sales areunusual for Rio National.Note 3: The decrease in long-term debt represents anunscheduled principal repayment; there was no newborrowing during the year.Note 4: On 1 January 2009, the company received cash fromissuing 400,000 shares of common equity at a priceof $25.00 per share.Note 5: A new appraisal during the year increased the estimatedmarket value of land held for investment by $2 million,which was not recognized in 2009 income.TABLE 13.7Rio National Corp.Supplemental notesfor 2009Revenue $300.80Total operating expenses (173.74)Operating profit 127.06Gain on sale 4.00Earnings before interest, taxes, depreciation& amortization (EBITDA) 131.06Depreciation and amortization (71.17)Earnings before interest & taxes (EBIT) 59.89Interest (16.80)Income tax expense (12.93)Net income $ 30.16TABLE 13.6Rio National Corp.Summary incomestatement for the yearended December 31,2009 (U.S. $ millions)Note: The dividend payout ratio is expected to be constant.Dividends paid (U.S. $ millions) $3.20Weighted average shares outstanding during 2009 16,000,000Dividend per share $0.20Earnings per share $1.89Beta 1.80TABLE 13.8Rio National Corp.Common equity datafor 2009Risk-free rate of return 4.00%Expected rate of return on market index 9.00% Median industry price/earnings (P/E) ratio 19.90 Expected industry earnings growth rate 12.00% TABLE 13.9 Industry and market data 31-Dec-09 Rio National’s past performance, you can assume that the company will grow at the same rate as the industry.” a. Calculate the value of a share of Rio National equity on December 31, 2009, using the constant growth model and the capital asset pricing model. b. Calculate the sustainable growth rate of Rio National on December 31, 2009. Use 2009 beginning-of-year balance sheet values.

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