Case study Encore international

a) Firm’s current book value per share n
=Book value of common stock/total no. of common stock
=60,000,000/2,500,000
=$24 per share

b) P/E ratio
= price / earnings
= 40/6.25
= 6.4 times
c)

1) current required return
= Rf + β (Rm – Rf )
= 6% +1.1(8.8 - 6)
=9.08%
Note: beta is assumed as there is no information of beta in the case study.

2) New required return
= Rf + β (Rm - Rf )
= 6% + 1.1 (10-6.6)
= 9.74%
d)

Ke =D1+ G Po
9.74 % = 4 x100+ 0 Po Po = $41.07

e)
1)Ke=D1+ G Po
9.74 % = 4.24 x100+ 6% Po
Po= $113.37
2) Po = D1 + D2 + P3 (1+Ke) (1+ke)2 (1+ke)3
= 4.32 + 4.67 + 56.82
1.0974 (1.0974)2 (1.0974)3 = 3.94 + 3.88 + 43
= $50.82

f) Current price of stock is $40
Price of stock in a) is $24
Price of stock in d) is $41.07
Price of stock in e) is $113.37 and $50.82
There is a difference between the above values because the there is a difference in the growth rate in part a) the stock price is based on the current book value. In part d) the value of stock is calculated by using the dividend model of growth rate and the growth is taken up to be constant. And lastly in the e) part the value of stock is calculated by taking up two growth rates for different time so the price of stock is different. The valuation of stock in e) part is the best method to calculate the price of stock as it undertakes the present value of the money and the time factor. Itis most suitable because it takes into account the growth rate which is not constant.