Solved: Bernice Mountaindog was glad to be back at Sea

Shore

Bernice Mountaindog was glad to be back at Sea Shore Salt. Employees were treated well.
When she had asked a year ago for a leave of absence to complete her degree in finance, top
management promptly agreed. When she returned with an honors degree, she was promoted
from administrative assistant (she had been secretary to Joe-Bob Brinepool, the president) to
treasury analyst.

Bernice thought the company's prospects were good. Sure, table salt was a mature business,
but Sea Shore Salt had grown steadily at the expense of its less well known competitors. The
company's brand name was an important advantage, despite the difficulty most customers had
in pronouncing it rapidly.

Bernice started work on January 2, 2011. The first 2 weeks went smoothly. Then Mr. Brinepool's
cost of capital memo (see Figure 13.2) assigned her to explain Sea Shore Salt's weighted-
average cost of capital to other managers. The memo came as a surprise to Bernice, so she
stayed late to prepare for the questions that would surely come the next day.

Bernice first examined Sea Shore Salt's most recent balance sheet, summarized in Table 13.6.
Then she jotted down the following additional points:

• The company's bank charged interest at current market rates, and the long-term debt had just
been issued. Book and market values could not differ by much.

• But the preferred stock had been issued 35 years ago, when interest rates were much lower.
The preferred stock, originally issued at a book value of $100 per share, was now trading for
only $70 per share.

• The common stock traded for $40 per share. Next year's earnings per share would be about
$4 and dividends per share probably $2. (10 million shares of common stock are outstanding.)
Sea Shore Salt had traditionally paid out 50% of earnings as dividends and plowed back the
rest.

• Earnings and dividends had grown steadily at 6% to 7% per year, in line with the company's
sustainable growth rate:

• Sea Shore Salt's beta had averaged about .5, which made sense,

Bernice thought, for a stable, steady-growth business. She made a quick cost of equity
calculation by using the capital asset pricing model (CAPM). With current interest rates of about
7%, and a market risk premium of 7%,

Reach out to freelance2040@yahoo.com for enquiry.

 This cost of equity was significantly less than the 16% decreed in Mr. Brinepool's memo.
Bernice scanned her notes apprehensively. What if Mr. Brinepool's cost of equity was wrong?
Was there some other way to estimate the cost of equity as a check on the CAPM calculation?
Could there be other errors in his calculations?

Bernice resolved to complete her analysis that night. If necessary, she would try to speak with
Mr. Brinepool when he arrived at his office the next morning. Her job was not just finding the
right number. She also had to figure out how to explain it all to Mr. Brinepool.

Table 13.6

Bernice Mountaindog was glad to be back at Sea Shore

ANSWER
https://solvedquest.com/bernice-mountaindog-was-glad-to-be-back-at-sea-shore/

Reach out to freelance2040@yahoo.com for enquiry.

Powered by TCPDF (www.tcpdf.org)