Encore Stock

tQuestion: a) What is the firm’s current book value per share?

Current book ratio per share = Book valueTotal common share
= 60,000,0002,500,000

= $ 24

b) What is the firm’s current P/E ratio?

Current P/E ratio = price per share of common stockearning per share

= $ 40$ 6.25

= $6.4

c) (1) What is the current required return for Encore stock?

Ri = rf+β (rm – rf)

=0.06 +1.1 (0.088)

= 0.16

(2) What will be the new required return for Encore stock assuming that they expand into European and Latin American markets as planned?

Rs =rf + β ( rm – rf)

= 0.06 + 1.1 (0.1)

=0.17

d) If the securities analysis are correct and there is no growth in 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.)

Po = Do (1+g)rs -g
= $ 4 (1+0)0.17-0

$23.53

e) (1) If the Jordan Ellis’s predictions are correct , what will be the value per share of Encore stock if the firm maintains a constant annual 6% growth rate in future dividends? ( Note: Continue to use the new required return here.)

Po = Do (1+g)rs-g

= $ 4 (1+0.06)0.17-0.06
= $ 38.55

(2) If Jordan Ellis’s predictions are correct, what will be the value per share of Encore stock if the firm maintains a constant annual 8% growth rate in dividends per share over the next 2 years and 6% thereafter?
Supernormal growth rate :
Year 1 & 2 g1 = 8 %
Year 3 & thereafter g2 = 6 % rs= 17 %
D0 = $ 4 D1 = D0 (1+g)n D2 = D0 (1+g)n D3 =D2 (1+g)n T = 0 g1= 8 % 1 2 g2 = 6 % 3 $4 = $ 4 (1+0.08)1 = $ 4 ( 1+0.08)2 =$ 4.67(1+0.06)1 = $ 4.32 = $ 4.67 =$ 4.95
PV =FV1+in Pv1 = $ 4.321+0.171 Pv2 = $ 4.671+0.172 Pv3 =D3rs-g
= $ 3.69 =$ 3.41 =$4.950.17-0.06 =$ 45