Given:

Data 2012 Value

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

a) firm’s current book value per share = Book Value of common stock equity / Total common shares outstandin

$24

b) firm’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 + Beta * (Rm - Rf)

Rf 6%

Rm - Rf 8.80%

Beta 1

current required return = 14.80%

c) 2 new required return Encore stock assuming that they expand into European and Latin American markets as plan

Rf 6%

Rm - Rf 10.00%

Beta 1
 current required return = 16.00%

d) If the securities analysts are correct and there is no growth in the future dividends, the value per share of the E

G 0%

Return 16.00%

D $4

value per share of the Encore stock = $ 25.00

e) 1 If Jordan Ellis’s predictions are correct, the value per share of Encore stock = D (1+G) / Return - G

G 6%

Return 16.00%

D $4

value per share of the Encore stock = $ 42.40

e) 2 If Jordan Ellis’s predictions are correct, the value per share of Encore stock:

P0 = Present value of dividends during initial growth period + present valu

D0 D1 D2 D3

Dividends $ 4.00 $ 4.32 $ 4.67 $ 4.95

PV facor @ 16% 0.862068966 0.743162901 0.640657674

Price of stock at end of growth period 52.4226816

Total price $ 4.32 $ 4.67 $ 57.37

Present Value $ 3.72 $ 3.47 $ 36.75

P0 = $ 43.94
 Price per
f) Valuation Method
Share

Market Value $40

Book Value $24

Zero Growth $ 25.00

Constant Growth $ 42.40

Variable Growth $ 43.94

The true value of the firm is not related with the book value. Thus other than this method, the growth method s
conservative for estimation of value of the firm. Analysts may advise to pay not more than $25 per share which
value. The most optimal method is variable growth model resulting in a value of $43.94 which is slighly above t
clearly the true value of stock. The value differ because of changing growth rates.
mmon shares outstanding

American markets as planned using CAPM:

e value per share of the Encore stock = D (1+G) / Return - G

Return - G

wth period + present value of price of stock at end of growth period

D4

$ 5.24
hod, the growth method seems to be most
han $25 per share which is just $1 more than book
4 which is slighly above the market value representing