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Analysis for Reeby Sports.

Given Data. We estimate the Capitalization rate as 12%. Ke 0.12
1996 1997 1998 1999 2000 2001 2002 2003

Base Year
2004 2005 E

EPS DIV BV/S hare ROE

-2.1 0 9.8 -27

-0.7 0 7.7 -7.1

0.23 0 7 3

0.8 0.2 7.6 11.6

1.1 0.2 8.51 14.5

1.3 0.3 9.5 15.2

1.12 0.3 10.73 16

1.64 0.6 11.77 15.3

2 0.6 13.17 17

2.03 0.8 14.4 15.4

The given data also states that: 1. To assume constant ROE for the next six years ie 2005 onwards. This is equal to the aggregate of ROE of year 2000 to year 2005. 2. To assume constant Plough back ratio for the next six years ie 2005 onwards. This is equal to the aggregate Plough back of the years 2000 to 2005. 3. After six years ie 2011 onwards, assume investment opportunity for growth is reduced. 4. Current Book Value of each share is $13.17 5. Industry P/E ratio is 13.1%. 6. Reeby’s P/E ratio is 6.6%

12 Year Assumed Value of G Dividend Payout $ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.08 0.3% The Present value of Reeby Stock now becomes a case of Super Natural Growth till 2011 then Declining Growth and then NO growth from 2016 onwards. Ke = .56% Till 2005. Capitalization rate is taken at 12%. we assume that till the Next 6 YEARS the opportunity for growth is there and then there is decline in Growth.662424454 1.018854641 2.11 0. Part1: As per Question.8 0. . Here as per the question.11 0.09509048 1. Growth Average for year 2000 to year 2005 is ∑ (Div2-Div1)/ Div1 = 11. Ie.215550433 1.11 0.986568 1.8888 0.ANALYSIS.8$.11 0.018854641 Part 2: Thus Numerical value of G is B*ROE.979269255 2.497679688 1.11 0. Taking 2005 as the Base Year.11 0.06 0.903143515 1.11 till 2011 and then decline in Growth.34926098 1. Average ROE = ∑ROE / 6 = 15.11 0.10% Ploughback ratio is thus B = G/ROE = 11. Current Growth till 2011 then Fall in value of G. Assuming Consistent growth for 6 YEARS ie G is 11.02 0 0 0. Case 1.04 0.79541841 1.56 = 71.10/15. Estimated Dividend Payout for 2005 is 0. Till 2005.

19 + .83 = 11.6 * 2.53$ of the current value of the share is because of the Present Value of Growth Opportunity.722 + . P0 = Supernatural Growth at 11. Thus 1/(6. Vg = 10.(Vg/11.8 * (1/{Ke-g}) * [1.66 * 11. = . P/E ratio of the company is 6. Thus price of one Share = 6.75 + .634 + 4.11% till 2011 then Declining Growth till 2015 and No growth from 2016 onwards.(Vg/P0)] P/E ratio is given as 6.66. Thus Earnings of 2005E are $2.8$ Thus Market price of Reeby share is $11.03 P0 = $13.39 .68 + .8.6.03. Case 2. Part3: Now we know that the Present Value of Growth Opportunity can be found by using the Result EPS1/P0 = Ke [1.53 Thus 10.12[1.{(1+g)/(1+Ke)}^n] + Div/[(1+Ke)^n] + Div1/Ke = 4.8)] Computing for the same.8) = . Same Growth Rate as of Average of year 2000 to year 2005.P0 for Reeby Now Becomes.

51 = P for 11.03) P = $26.23%.51 P0 = $26. If we assume that the company will maintain its Growth rate and achieve the Industry P/E ratio of 13. 26.1% growth for 6years + Perpetual growth.51 In this case P0 = Growth at 11. P/E = 13.39 $ 11. This can be shown as: P0 = 26.1 * (2.111}] + Div1/(Ke-g) Using this equation g after 6 years is found to be 8.23% perpetually.51 = 8 * (1/{Ke-g}) * [1.8 $ 26.12 Growth Rate Current Normal Declining Growth Industry Average Growth Present Value $ 13.1% for six years then growth at 8.51 .1% then in that case.{(1+g)/(1+Ke)}^n {g= .1 P = 13.Case 3. Case Summary for Ke = .