25 Jul DISCUSS WHY THESE VALUES MAY DIFFER.
In the world of surf attire instinct and marketing savvy are prerequisites to success. Josh Atwood Show more In the world of surf attire instinct and marketing savvy are prerequisites to success. Josh Atwood had both. During 2013 his international surfing company J. Atwood rocketed to $900 million in sales after 10 years in business. His fashion line covered the surfers from head to toe with hats shirts pants shorts sweatshirts socks and shoes. In L.A. there was a J. Atwood shop every five or six blocks each featuring a different color. Some shops showed the entire line in mauve and others featured it in canary yellow. J. Atwood had made it. The companys historical growth was so spectacular that no one could have predicted it. However securities analysts speculated that J. Atwood could not keep up the pace. They warned that competition is fierce in the fad fashion industry and that the firm 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 Josh Atwood feels that the company could maintain a constant annual growth rate in dividends per share of 8% in the future or possibly 11% for the next 2 years and 8% thereafter. Atwood 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 firm as measured by the beta on its stock to increase immediately from its current beta of 1.1 to a beta of 1.25. In preparing the long-term financial plan J. Atwoods chief financial officer has assigned a junior financial analyst Brad Harris to evaluate the firms current stock price. He has asked Brad to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder Josh Atwood. Mark has compiled these 2013 financial data to aid his analysis: Data item Data item 2013 value Earnings per share (EPS) Earnings per share (EPS) $5 Price per share of common stock Price per share of common stock $50 Book value of common stock equity Book value of common stock equity $50000000 Total common shares outstanding Total common shares outstanding 10000000 Common stock dividend per share Common stock dividend per share $4 Data Points Data Points Data Points Beta b Required Return K Required Return K 0 2.0% 2.0% .25 5.45% 5.45% .5 7.0% 7.0% .75 10.00% 10.00% 1 13.50% 13.50% 1.25 16.50% 16.50% 1.5 20% 20% To Do a. (1) What is the current required return for J. Atwood stock (use CAPM)? (2) What will be the new required return for J. Atwood stock assuming that they expand into European and Latin American markets as planned (use CAPM)? b. If the securities analysts are correct and there is no growth in future dividends what will be the value per share of the J. Atwood stock? (Note: use the new required return on the companys stock here) c. (1) If Josh Atwoods predictions are correct what will be the value per share of J. Atwoods stock if the firm maintains a constant annual 8.0% growth rate in future dividends? (Note: Continue to use the new required return here.) (2) If Josh Atwoods predictions are correct what will be the value per share of J. Atwoods stock if the firm maintains a constant annual 11% growth rate in dividends per share over the next 2 years and 8% thereafter? (Note: Use the new required return here.) d. Compare the current (2013) price of the stock and the stock values found in parts a d and e. Discuss why these values may differ. Which valuation method do you believe most clearly represents the true value of the J. Atwood stock and WHY? Names and numbers have been altered from the original assignment. Show less
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