At the end of its 2015 fiscal year-end Ramos Corporation had 250,000 shares of
preferred stock outstanding. The preferred stock has a book value of $50 per share. In
addition, Ramos paid $120,000 in dividends to preferred shareholders in 2015. Ramos
also has $8,500,000 of interest bearing debt outstanding and its after-tax cost of debt is
3.4%. The market value of Ramos Corporationâ€™s 805,000 common shares outstanding at
year end is $32,200,000 and the company’s cost of common equity is 9%. Ramos paid a
$3.00 dividend in 2015. Analysts expect Ramos to increase its dividend payout by 2%
annually over the long term. Ramos reported net income of $1,988,000 in 2015. The
average PE ratio in Ramosâ€™ industry is 12.8 on a trailing basis. Ramos had a net profit
margin of 10.5% and an EBITDA margin of 32.5% in 2015.
a. Calculate the value of Ramos stock using the dividend discount model (DDM).
Round to the nearest dollar. What can you conclude about the Companyâ€™s
implied value from the DDM compared to its current market price?
b. What is Ramosâ€™ PE ratio?
c. Conclude on the Companyâ€™s PE ratio relative to its peers and describe what
might account for the difference.
d. Calculate the Companyâ€™s EV / EBITDA multiple.
e. What is the total book value of Ramos Corporationâ€™s preferred stock at the end of
f. Estimate the cost of Ramos Corporationâ€™s preferred equity capital.
g. Calculate Ramos Corporationâ€™s weighted average cost of capital.