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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%. Encores CFO assigned junior financial analyst, Marc Scott, to evaluate the firms current stock by considering the conservatives and Jordan Elliss predictions.

II. Analysis
Data Item Earnings per share Price per share of common stock Book value of common stock equity Total common shares outstanding Common stock dividend per share a. Firms current book value per share: Book value = $ 60 million = $24 Shares outstanding 2.5 million b. Firms current P/E ratio: Price per share of common stock = $ 40 = 6.4 EPS $ 6.25 c. Required return of Encore Stock (Use Capital Asset Pricing Model / CAPM)
risk premium

2012 value $6.25 $40 $60,000,000 2,500,000 $4

1. Current:

= RFR + stock (Rmarket RFR) = 6% + (8.8%) assume stock = 1 = 6% + 1 (8.8%) = 14.8%

2. After expand:

= RFR + stock (Rmarket RFR) = 6% + 1 (10%) assume stock = 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 Kg 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) + $4 x (1.08) x (1 + 6%) (1.16) (1.16) 16% - 6% (1.16) = $3.72 + $3.47 + 4.67 x (1.06) 10% (1.16) = $7.19 + $ 49.5 (1.16) = $ 7.19 + $ 36.79 = $ 43.98 f. Valuation Method BV per share Zero Growth Constant growth Variable Growth Stock Price Value $24 $25 $42.4 $43.98 $40

These values are different because it has differences on dividend growth. Explanations: BV per 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 method, but lacks of reality sense therefore not a 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 3.1 Conclusion


Based on the calculation, the firms current stock is still undervalued 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 or declining.

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