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Church & Dwight, a large producer of sodium bicarbonate, reported earnings
per share of $1.50 in 1993 and paid dividends per share of $0.42. In 1993, the
firm also reported the following:
Net income =$30 million
Interest expense =$0.8 million
Book value of debt =$7.6 million
Book value of equity =$160 million
The firm faced a corporate tax rate of 38.5%. (The market value debt-to-equity
ratio is 5%. The Treasury bond rate is 7%.)
The firm expected to maintain these financial fundamentals from 1994 to
1998, after which it was expected to become a stable firm, with an earnings
growth rate of 6%. The firm's financial characteristics were expected
to approach industry averages after 1998. The industry averages were as
follows:
Return on capital =12.5%
Debt/equity ratio =25%
Interest rate on debt =7%
Church & Dwight had a beta of 0.85 in 1993, and the unlevered beta was not
expected to change over time.
a. What is the expected growth rate in earnings, based on fundamentals, for the
high-growth period (1994 to 1998)?

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Church amp Dwight a large producer of sodium bicarbonate.pdf

  • 1. Church & Dwight, a large producer of sodium bicarbonate, reported earnings per share of $1.50 in 1993 and paid dividends per share of $0.42. In 1993, the firm also reported the following: Net income =$30 million Interest expense =$0.8 million Book value of debt =$7.6 million Book value of equity =$160 million The firm faced a corporate tax rate of 38.5%. (The market value debt-to-equity ratio is 5%. The Treasury bond rate is 7%.) The firm expected to maintain these financial fundamentals from 1994 to 1998, after which it was expected to become a stable firm, with an earnings growth rate of 6%. The firm's financial characteristics were expected to approach industry averages after 1998. The industry averages were as follows: Return on capital =12.5% Debt/equity ratio =25% Interest rate on debt =7% Church & Dwight had a beta of 0.85 in 1993, and the unlevered beta was not expected to change over time. a. What is the expected growth rate in earnings, based on fundamentals, for the high-growth period (1994 to 1998)?