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 Corporation’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 Ramos’ 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 Company’s
implied value from the DDM compared to its current market price?
b. What is Ramos’ PE ratio?
c. Conclude on the Company’s PE ratio relative to its peers and describe what
might account for the difference.
d. Calculate the Company’s EV / EBITDA multiple.
e. What is the total book value of Ramos Corporation’s preferred stock at the end of
f. Estimate the cost of Ramos Corporation’s preferred equity capital.
g. Calculate Ramos Corporation’s weighted average cost of capital.