 We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

# Encore international The whole doc is available only for registered users

A limited time offer! Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

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

## Conclusion

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.

##### Related Topics

We can write a custom essay

Order an essay 300+
Materials Daily 100,000+ Subjects
2000+ Topics Free Plagiarism
Checker All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

Sorry, but only registered users have full access

immediately?

Thank You A Lot! Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?