Valuing Stocks

GROUP 5Mini-Case (Page 179)

Tuesday Evening Class

Idrish Khan Andrew TomasiSheba CavuLisa Levy-DakunaVinita Prasad

Mini Case Study Summary

Your Investment adviser has sent you three analyst reports for a young , growing company named Vegas Chips, Incorporated . These reports depict the company as speculative, but each one poses different projection of the company’s future growth rate in earnings and dividends.

All three reports show ; Vegas Chips earned $1.20 per share in the year just ended. There is consensus that a fair rate of return to investors for this

common stock is 14% That management expects to consistently earn a 15% return on the

book value of equity (ROE = 15%)

Question 1.

What model can you use to value a share of common stock in Vegas Chips?

The company should use Zero Growth Model to value its stock

Zero Growth Model is used because the company has declared 100% of earnings as dividend

Using this model :

= $8.57 Per Common Share

Question 2.

What model can you use to value a share of common stocks in Vegas Chips?

The company should use Constant Growth Model to value its stock

Constant growth Model is used because the company dividend is expected to grow at a constant or steady growth rate of 9% per annum

Cont’d - Using the Constant Value model.

EPS = $1.20Payout Rate = 40%Retention Rate = 60% (1-40%)

Growth Rate = ROE x rr (Retention Retained) = 0.15 x 0.6 = 0.09

= 1.20 x 40% = 0.48  = =

= $10.46 Per Common Share

Question 3

The company should use the Variable Growth Model to value its stock

Variable growth Model is used because the company’s dividend growth rate varies

It is also indicates a rapid growth rate in the first few years

Becomes constant thereafter

Cont’d

 (1+)=0.48(1.50) =0.72(1+)=0.72(1.20) =0.864(1+)=0.864(1.20) =1.0368(1+)=1.0368(1.09) =1.1301

  

= $15.27

  = 0.63 + 0.67 + 0.70 + 15.27

= $17.27 Per Common Share

Cont’d

Question 4

Conclusion :

Audited Annual Financial statement

Percentage of market share

Projections, forecasts, budget

Business plan

List of competitors and estimated annual billings in the Target’s market areas

Legal litigation against the company.

 

Questions

Thank You