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Case Study Chapter 7: Encore International In the world of...

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Case Study Chapter 7: Encore International
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In the world of trendsetting fashion, instinct and marketing savvy are prerequisites to success. 24/7. Answers in as fast as 15 minutes.
Jordan Ellis had both. During 2012, his international casual-wear company, Encore, rocketed to $300
million in sales after 10 years in business. His fashion line covered the young woman from head to toe Enter a question
with hats, sweaters, dresses, blouses, skirts, pants, sweatshirts, socks, and shoes. In Manhattan, there
was an Encore shop every ve or six blocks, each featured it in canary yellow.
Encore had made it. The company's historical growth was so spectacular that no one could have
predicted it. However, securities analysts speculated that Encore could not keep up the pace. They
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warned that competition is erce in the fashion industry and that the rm might encounter little or no
growth in the future. They estimated that stockholders also should expect no growth in future
dividends.
Contrary to the conservative securities analysts, Jordan Ellis felt that the company could
maintain a constant annual growth rate in dividends per share of 6% in the future, or possibly 8% for
the next 2 years and 6% thereafter. Ellis based his estimates on an established long-term expansion
plan into European and Latin American markets. Venturing into these markets was expected to cause
the risk of the rm, as measured by the risk of the rm, as measured by the risk premium on its stock,
to increase immediately from 8.8% to 10%. Currently, the risk-free rate is 6%.
In preparing the long-term nancial plan, Encore's chief nancial o cer has assigned a junior
nancial analyst, Marc Scott, to evaluate the rm's current stock price. He has asked Marc to consider
the conservative predictions of the securities analysts and the aggressive predictions of the company
founder, Jordan Ellis.
Marc has compiled these 2012 nancial data to aid his analysis:

Data--------------------------------------------2012 value
Earnings per share (EPS)-------------------$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----------$4.00

To Do

a. What is the rm's current book value per share?

b. What is the rm's current P/E ratio?
c. (1) What is the current required return for Encore stock?
(2) What will be the new required return Encore stock assuming that they expand into European
and Latin American markets as planned?
d. If the securities analysts are correct and there is no growth in the future dividends, what will be
the value per share of the Encore stock? (Note: Use the new required return on the company's stock
here)
e. (1) If Jordan Ellis's predictions are correct, what will be the value per share of Encore stock if the
rm maintains a constant annual 6% growth rate in future 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 of Encore stock if the
rm maintains constant annual 8% growth rate in dividends per share over the next 2 years and 6%
thereafter?
f. Compare the current (2012) price of the stock and the stock values found in parts a, d, and e.
Discuss why these values may di er. Which valuation method do you believe most clearly represents
the true value of the Encore stock?

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Given:
Data 2012 Value EPS $6.25 Price per share of common stock
Book Value of common stock equity $40
$60,000,000 Total common shares outstanding a) 2,500,000 Common
stock dividend per share $4 rm’s current book value per share = Book
Value of common stock equity / Total common shares outstanding
$24 b) rm’s current P/E ratio = Price per share of common stock / EPS
$6.40 c) 1 current required return for Encore stock using CAPM = Rf +
섘 Beta * (Rm - Rf)
Rf 6% Rm - Rf 8.80% Beta 1 current required return = c) 2 14.80% new
8550755.xlsx
required return Encore stock assuming that they expand into European

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