Reby Sports
Earning per Share(EPS) = (Return on Equity)ROE * BV (Book value per share)
EPS ha two parts:
1. Dividend
2. Retained Earnings
As retained earnings are reinvested the book value grows as perplaw back ratio which is (1- dividend payout ratio).The company’s growth depends upon return on equity i.e profitability & reinvestment of retained earnings.
As per the case, assuming the ROE of the year 2006 to 2011 for six years as the average ROE of year 2000 to 2005 i.e 15.58% and plaw back ratio as average of years 2000 to 2005 i.e 72.17%, we will compute the dividends, EPS and book value of share till 2011.
Growth rate (g) = b * ROE (where “b” is plaw back ratio) =0.72*0.156 =0.11 (i.e 11%)
The P/E ratio of the company is 6.6 and it’s competitor is having a plaw back ratio 13.1.It indicates that there is scope for profitability in the sports industry market.So other players will enter as per microeconomic view for earning profits. The company will looseit’s competitive edge as other companies enter to the market. So it can’t continue earning more than 10% of it’s cost of capital.
So assuming the ROE to be reduced to 10% at the starting of year 2012, The growth rate during the year 2012, g = b* ROE = 0.72*0.1=0.07
For calculating the share value we have to calculate the perpetual value at 2011 and discount the same to year 2005 and add it to the pV of dividends paid between 2006-2011.
Perpetual value at 2011, using constant growth DCF formula
P6 = DIV7/ (Ke- g) =DIV6(1+g)/(Ke-g)
From the attached spread sheet DIV6 =1.1
P6=1.1*(1+0.07)/(0.1-0.07)
=40.99
Present value of P6 at 2005 =40.99/(1+0.1)^6 =23.141
Present value of dividends from 2006 to 2011 = 3.5
P0 = PV of P6 + PV of Dividends =23.141+3.5 = $26.65
After 2011 we have reduced the ROE to 10% .Assume the growth opportunity is not there after 2005.For calculating the PVGO (present value of growth opportunities), Set PVGO=0,g=0
P0 = EPS1/Ke
EPS ha two parts:
1. Dividend
2. Retained Earnings
As retained earnings are reinvested the book value grows as perplaw back ratio which is (1- dividend payout ratio).The company’s growth depends upon return on equity i.e profitability & reinvestment of retained earnings.
As per the case, assuming the ROE of the year 2006 to 2011 for six years as the average ROE of year 2000 to 2005 i.e 15.58% and plaw back ratio as average of years 2000 to 2005 i.e 72.17%, we will compute the dividends, EPS and book value of share till 2011.
Growth rate (g) = b * ROE (where “b” is plaw back ratio) =0.72*0.156 =0.11 (i.e 11%)
The P/E ratio of the company is 6.6 and it’s competitor is having a plaw back ratio 13.1.It indicates that there is scope for profitability in the sports industry market.So other players will enter as per microeconomic view for earning profits. The company will looseit’s competitive edge as other companies enter to the market. So it can’t continue earning more than 10% of it’s cost of capital.
So assuming the ROE to be reduced to 10% at the starting of year 2012, The growth rate during the year 2012, g = b* ROE = 0.72*0.1=0.07
For calculating the share value we have to calculate the perpetual value at 2011 and discount the same to year 2005 and add it to the pV of dividends paid between 2006-2011.
Perpetual value at 2011, using constant growth DCF formula
P6 = DIV7/ (Ke- g) =DIV6(1+g)/(Ke-g)
From the attached spread sheet DIV6 =1.1
P6=1.1*(1+0.07)/(0.1-0.07)
=40.99
Present value of P6 at 2005 =40.99/(1+0.1)^6 =23.141
Present value of dividends from 2006 to 2011 = 3.5
P0 = PV of P6 + PV of Dividends =23.141+3.5 = $26.65
After 2011 we have reduced the ROE to 10% .Assume the growth opportunity is not there after 2005.For calculating the PVGO (present value of growth opportunities), Set PVGO=0,g=0
P0 = EPS1/Ke