Encore 1

EXECUTIVE SUMMARY Encore International, a causal-wear company, has spectacular growth after 10 year of business and plan to have long-term expansion into European and Latin American markets while maintain its growth in future dividends.

I.

Objective

Encore International is a company that has spectacular growth. However the analysts speculated that Encore might encounter little or no growth in the future and no growth in future dividends. On the contrary, Jordan Ellis-the company founder, felt that company could maintain constant annual growth rate in dividends per share of 6%, 8% for next 2 years and 6% thereafter based on the expansion plan to European and Latin American markets. This expected to cause the risk from 8.8% to 10%. The risk free rate is 6%. Encore’s CFO assi gned junior financial analyst, Marc Scott, to evaluate the firm’s current stock by considering the conservative’s and Jordan Ellis’s predictions.

II.

Analysis Data Item

2012 value

Earnings per share

$6.25

Price per share of common stock

$40

Book value of common stock equity

$60,000,000

Total common shares outstanding

2,500,000

Common stock dividend per share

$4

a. Firm’s current book value per share: Book value = $ 60 million = $24 Shares outstanding 2.5 million b. Firm’s current P/E ratio: Price per share of common common stock = $ 40 = 6.4 EPS $ 6.25 c.

Required return of Encore Stock (Use Capital Asset Pricing Model / CAPM) risk premium

1. Current:

= RFR + βstock (Rmarket – RFR) = 6% +β (8.8%)  assume βstock = 1

= 6% + 1 (8.8%) = 14.8% 2. After expand:

= RFR + βstock (Rmarket – RFR) = 6% + 1 (10%)  assume βstock = 1 = 16%

d. Value per share of Encore stock assuming there is no growth in future dividends Po = D = $ 4 x 1  1 = because no growth in dividend K – g 16% - 0 =

4 = $ 25 16%

e. (1) Value per share with 6% future dividends growth Po =

D = $ 4 x 1.06 = $42.4 K – g 16% - 6%

(2) Value per share with dividend growth 8% in next 2 years and 6% thereafter Po = $4 x (1.08) + $4 x (1.08)² + $4 x (1.08)² x (1 + 6%) (1.16) (1.16)² 16% - 6% (1.16)² = $3.72 $3.72 + $3.47 + 4.67 x (1.06) 10% (1.16)² = $7.19 + $ 49.5 (1.16)² = $ 7.19 + $ 36.79 = $ 43.98 f.

Valuation Method

Value

BV per share

$24

Zero Growth

$25

Constant growth

$42.4

Variable Growth

$43.98

Stock Price

$40

These values are different because it has differences on dividend growth. Explanations: BV per share: share: can not be used as stock valuation, except comparing it with peers and using it as P/B multiples. Zero growth: the most conservative conservative method, but lacks of of reality sense therefore not a good good method Constant & variable growth: both methods have similar stock price target, but variable growth is more realistic since it measures shift up or down due to the changing expectations.

III. Conclusion and Recommendation Recommendation 3.1 Conclusion Based on the calculation, the firm’s current stock is still underva lued compare to the value of stock with constant or variable growth. Zero growth calculation is considering not a good method because it will have changes in future whether it increasing i ncreasing or declining.

3.2 Recommendation:

In order to have growth in future dividend, Encore has to consider its financial plan and risk thoroughly.