Use the table for the question(s)below.

-Banco Industries expects 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 expects 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.Banco Industries' stock price will increase by $2.80 if they can reduce their operating expenses so that EBIT becomes 12% of sales. This is because the company's EBIT will increase by $12 million, which will lead to an increase in net income of $9.6 million. This will, in turn, lead to an increase in earnings per share of $0.53. The stock price will then increase by $2.80, which is equal to the increase in earnings per share multiplied by the current stock price of $5.30.

Use the Table for the Question(s)below