Stock Valuation 5 points You are interested in purchasing the common stock of Azure Corporation. The firm recently paid a dividend of $3 per share. It expects its earngins — and hence its dividends — to grow at a rate of 7% for the foreseeable future. Currently, similar risk stocks have required returns of 10%. (

a) Given the data, calculate the present value of this security

b)One year later your broker offers to sell you additional shares of Azure at $73. The most recent dividend paid was $3.21, and the expected growth rate for earnings remains at 7%. if you determine that the appropriate risk premium is 6.74% and you observe that the risk free rate is 5.25%,what is the firm required return?

c)determine the value of stock using new dividend and required return from part b

d)given your calculation from part c, would you buy the additional shares from your broker at $73 per share?explain

e)given your calculation in part c, would you sell your old shares for $73. explain

In the world of trendsetting fashion, instinct and marketing savvy are prerequisitesto success. Jordan Ellis had both. During 2012, his international casual-wear company,Encore, rocketed to $300 million in sales after 10 years in business. Hisfashion line covered the young woman from head to toe with hats, sweaters, dresses,blouses, skirts, pants, sweatshirts, socks, and shoes. In Manhattan, there was anEncore shop every five or six blocks, each featuring a different color. Some shopsshowed the entire line in mauve, and others featured it in canary yellow.Encore had made it. The company’s historical growth was so spectacular thatno one could have predicted it. However, securities analysts speculated that Encorecould not keep up the pace. They warned that competition is fierce in the fashionindustry and that the firm might encounter little or no growth in the future. Theyestimated that stockholders also should expect no growth in future dividends.Contrary to the conservative securities analysts, Jordan Ellis felt that the companycould maintain a constant annual growth rate in dividends per share of 6% inthe future, or possibly 8% for the next 2 years and 6% thereafter. Ellis based hisestimates on an established long-term expansion plan into European and LatinAmerican markets. Venturing into these markets was expected to cause the risk ofthe firm, as measured by the risk premium on its stock, to increase immediately from8.8% to 10%. Currently, the risk-free rate is 6%.In preparing the long-term financial plan, Encore’s chief financial officer hasassigned a junior financial analyst, Marc Scott, to evaluate the firm’s current stockprice. He has asked Marc to consider the conservative predictions of the securitiesanalysts and the aggressive predictions of the company founder, Jordan Ellis.Marc has compiled these 2012 financial data to aid his analysis:304Integrative Case 3Data item 2012 value

Earnings per share (EPS) $6.25

Price per share of common stock $40.00

Book value of common stock equity $60,000,000

Total common shares outstanding 2,500,000

Common stock dividend per share $4.00

a)What is the firm’s current book value per share?

b. What is the firm’s current P/E ratio?c.

(1) What is the current required return for Encore stock?

(2) What will be the new required return for Encore stock assuming that theyexpand into European and Latin American markets as planned?

d. If the securities analysts are correct and there is no growth in future dividends,what will be the value per share of the Encore stock? (Note: Use the newrequired return on the company’s stock here.e.

(1) If Jordan Ellis’s predictions are correct, what will be the value per share ofEncore stock if the firm maintains a constant annual 6% growth rate infuture dividends? (Note: Continue to use the new required return here.)(2) If Jordan Ellis’s predictions are correct, what will be the value per share ofEncore stock if the firm maintains a constant annual 8% growth rate in dividendsper share over the next 2 years and 6% thereafter?

f. Compare the current (2012) price of the stock and the stock values found inparts a, d, and e. Discuss why these values may differ. Which valuation methoddo you believe most clearly represents the true value of the Encore stock?