Analysis for Reeby Sports.

Given Data.

We estimate the Capitalization rate as 12%.

Ke 0.12Base Year

1996 1997 1998 1999 2000 2001 2002 2003 20042005

E

EPS -2.1 -0.7 0.23 0.8 1.1 1.3 1.12 1.64 2 2.03

DIV 0 0 0 0.2 0.2 0.3 0.3 0.6 0.6 0.8

BV/Share

9.8 7.7 7 7.6 8.51 9.5 10.73 11.77 13.17 14.4

ROE -27 -7.1 3 11.6 14.5 15.2 16 15.3 17 15.4

The given data also states that:

1. To assume constant ROE for the next six years ie 2005 onwards. This is equal to the aggregate of ROE of year 2000 to year 2005.

2. To assume constant Plough back ratio for the next six years ie 2005 onwards. This is equal to the aggregate Plough back of the years 2000 to 2005.

3. After six years ie 2011 onwards, assume investment opportunity for growth is reduced.

4. Current Book Value of each share is $13.175. Industry P/E ratio is 13.1%.6. Reeby’s P/E ratio is 6.6%

ANALYSIS.

Case 1.

Part1: As per Question.

Assuming Consistent growth for 6 YEARS ie G is 11.11 till 2011 and then decline in Growth.

Here as per the question, we assume that till the Next 6 YEARS the opportunity for growth is there and then there is decline in Growth. Ie.

Current Growth till 2011 then Fall in value of G. Capitalization rate is taken at 12%.

Taking 2005 as the Base Year. Estimated Dividend Payout for 2005 is 0.8$.

Ke = .12

Year Assumed Value of G Dividend Payout $

2005 0.11 0.8

2006 0.11 0.8888

2007 0.11 0.9865682008 0.11 1.095090482009 0.11 1.2155504332010 0.11 1.349260982011 0.11 1.4976796882012 0.08 1.6624244542013 0.06 1.795418412014 0.04 1.9031435152015 0.02 1.9792692552016 0 2.0188546412017 0 2.018854641

Part 2:

Thus Numerical value of G is B*ROE.

Till 2005, Average ROE = ∑ROE / 6 = 15.56%

Till 2005, Growth Average for year 2000 to year 2005 is ∑ (Div2-Div1)/ Div1 = 11.10%

Ploughback ratio is thus B = G/ROE = 11.10/15.56 = 71.3%

The Present value of Reeby Stock now becomes a case of Super Natural Growth till 2011 then Declining Growth and then NO growth from 2016 onwards.

P0 for Reeby Now Becomes.

P0 = Supernatural Growth at 11.11% till 2011 then Declining Growth till 2015 and No growth from 2016 onwards.

= .8 * (1/{Ke-g}) * [1- {(1+g)/(1+Ke)}^n] + Div/[(1+Ke)^n] + Div1/Ke

= 4.19 + .75 + .722 + .68 + .634 + 4.83

= 11.8$

Thus Market price of Reeby share is $11.8.

Part3:

Now we know that the Present Value of Growth Opportunity can be found by using the Result

EPS1/P0 = Ke [1- (Vg/P0)]

P/E ratio is given as 6.66.

Thus

1/(6.66 * 11.8) = .12[1- (Vg/11.8)]

Computing for the same.

Vg = 10.53

Thus 10.53$ of the current value of the share is because of the Present Value of Growth Opportunity.

Case 2.

Same Growth Rate as of Average of year 2000 to year 2005 .

P/E ratio of the company is 6.6.

Thus Earnings of 2005E are $2.03.

Thus price of one Share = 6.6 * 2.03

P0 = $13.39

Case 3.

If we assume that the company will maintain its Growth rate and achieve the Industry P/E ratio of 13.1% then in that case.

P/E = 13.1

P = 13.1 * (2.03)

P = $26.51

P0 = $26.51

In this case

P0 = Growth at 11.1% for six years then growth at 8.23% perpetually.

This can be shown as:

P0 = 26.51 = P for 11.1% growth for 6years + Perpetual growth.

26.51 = 8 * (1/{Ke-g}) * [1- {(1+g)/(1+Ke)}^n {g= .111}] + Div1/(Ke-g)

Using this equation g after 6 years is found to be 8.23%.

Case Summaryfor Ke = .12

Growth Rate Present Value

Current Normal $ 13.39Declining Growth $ 11.8

Industry Average Growth $ 26.51