Rio National Corp. is a U.S.-based company

Rio National Corp. is a U.S.-based company

Subject: Business    / Finance   
Question
Rio National Corp. is a U.S.-based company and the largest competitor in its industry.
Tables 13.5–13.8 present financial statements and related information for the company.
Table 13.9 presents relevant industry and market data.
The portfolio manager of a large mutual fund comments to one of the fund’s analysts,
Katrina Shaar: “We have been considering the purchase of Rio National Corp. equity
shares, so I would like you to analyze the value of the company. To begin, based on
2009 2008
Cash $ 13.00 $ 5.87
Accounts receivable 30.00 27.00
Inventory 209.06 189.06
Current assets $252.06 $221.93
Gross fixed assets 474.47 409.47
Accumulated depreciation (154.17) (90.00)
Net fixed assets 320.30 319.47
Total assets $572.36 $541.40
Accounts payable $ 25.05 $ 26.05
Notes payable 0.00 0.00
Current portion of long-term debt 0.00 0.00
Current liabilities $ 25.05 $ 26.05
Long-term debt 240.00 245.00
Total liabilities $265.05 $271.05
Common stock 160.00 150.00
Retained earnings 147.31 120.35
Total shareholders’ equity $307.31 $270.35
Total liabilities and shareholders’ equity $572.36 $541.40
TABLE 13.5
Rio National Corp.
Summary year-end
balance sheets
(U.S. $ millions)
www.mhhe.com/bkm
430 Part FOUR Security Analysis
Note 1: Rio National had $75 million in capital expenditures
during the year.
Note 2: A piece of equipment that was originally purchased for
$10 million was sold for $7 million at year-end, when it
had a net book value of $3 million. Equipment sales are
unusual for Rio National.
Note 3: The decrease in long-term debt represents an
unscheduled principal repayment; there was no new
borrowing during the year.
Note 4: On 1 January 2009, the company received cash from
issuing 400,000 shares of common equity at a price
of $25.00 per share.
Note 5: A new appraisal during the year increased the estimated
market value of land held for investment by $2 million,
which was not recognized in 2009 income.

TABLE 13.7
Rio National Corp.
Supplemental notes
for 2009
Revenue $300.80
Total operating expenses (173.74)
Operating profit 127.06
Gain on sale 4.00
Earnings before interest, taxes, depreciation
& amortization (EBITDA) 131.06
Depreciation and amortization (71.17)
Earnings before interest & taxes (EBIT) 59.89
Interest (16.80)
Income tax expense (12.93)
Net income $ 30.16

TABLE 13.6
Rio National Corp.
Summary income
statement for the year
ended December 31,
2009 (U.S. $ millions)
Note: The dividend payout ratio is expected to be constant.
Dividends paid (U.S. $ millions) $3.20
Weighted average shares outstanding during 2009 16,000,000
Dividend per share $0.20
Earnings per share $1.89
Beta 1.80

TABLE 13.8
Rio National Corp.
Common equity data
for 2009
Risk-free rate of return 4.00%
Expected rate of return on market index 9.00%
Median industry price/earnings (P/E) ratio 19.90
Expected industry earnings growth rate 12.00%

TABLE 13.9
Industry and market data
31-Dec-09
Rio National’s past performance, you can assume that the company will grow at the
same rate as the industry.”
a. Calculate the value of a share of Rio National equity on December 31, 2009, using
the constant growth model and the capital asset pricing model.    
b. Calculate the sustainable growth rate of Rio National on December 31, 2009. Use
2009 beginning-of-year balance sheet values.