Encore International Case Study

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Encore International Case Study

By | June 2012
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MM 5009
FINANCIAL MANAGEMENT

Encore International

R46 B – Syndicate 3
Audi Hakim(29111303)
Karina Soedjati(29111309)
M. Rahadi Prasetya(29111325)
Debby Sugithio(29111330)
Gilang Surawijaya(29111350)
Annisa Trinezia(29111372)

MASTER OF BUSINESS ADMINISTRATION
SCHOOL OF BUSINESS AND MANAGEMENT
INSTITUT TEKNOLOGI BANDUNG
2012

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%. Encore’s CFO assigned junior financial analyst, Marc Scott, to evaluate the firm’s current stock by considering the conservative’s and Jordan Ellis’s predictions.

II. Analysis
Data Item2012 value
Earnings per share$6.25
Price per share of common stock$40
Book value of common stock equity$60,000,000
Total common shares outstanding2,500,000
Common stock dividend per share$4
a. Firm’s current book value per share:
Book value = $ 60 million = $24
Shares outstanding 2.5 million
b. Firm’s 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
1. Current:= RFR + βstock (Rmarket – RFR)
= 6% +β (8.8%) assume βstock = 1
= 6% + 1 (8.8%)
= 14.8%...

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