Use the table for the question(s)below.
-Banco Industries expect sales to grow at a rapid rate over the next 3 years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.Banco industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding.If Banco Industries can reduce their operating expenses so that EBIT becomes 12% of sales,by how much will their stock price increase?

Question

Use the table for the question(s)below. 
-Banco Industries expect sales to grow at a rapid rate over the next 3 years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.Banco industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding.If Banco Industries can reduce their operating expenses so that EBIT becomes 12% of sales,by how much will their stock price increase?

Quizplus · Accepted Answer

The correct answer is A.The stock price will increase by $2.81 if Banco Industries can reduce their operating expenses so that EBIT becomes 12% of sales. This is because the EBIT margin will increase from 10% to 12%, which will lead to an increase in earnings per share. The increase in earnings per share will then lead to an increase in the stock price.

Use the Table for the Question(s)below