Case Study

Encore International In the world of trendsetting fashion, instinct and marketing savvy are
prerequisites to success. Jordan Ellis had both. During 2012, his international casual-wear company,
Encore, rocketed to $300 million in sales after 10 years in business. His fashion line covered the
young woman from head to toe with hats, sweaters, dresses, blouses, skirts, pants, sweatshirts,
socks, and shoes. In Manhattan, there was an Encore 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.
Encore had made it.

The company's historical growth was so spectacular that no one could have predicted it.
However, securities analysts speculated that Encore could not keep up the pace. They warned that
competition is fierce in the 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, Jordan Ellis felt that the company could maintain a constant
annual growth rate in dividends per share of 6% in the future, or possibly 8% for the next 2 years
and 6% thereafter. Ellis 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 risk premium on its stock, to increase immediately from 8.8% to
10%. Currently, the risk-free rate is 6%.

In preparing the long-term financial plan, Encore's chief financial officer has assigned a
junior financial analyst, Marc Scott, to evaluate the firm's current stock price. He has asked Marc to
consider the conservative predictions of the securities analysts and the aggressive predictions of the
company founder, Jordan Ellis. Marc has compiled these 2012 financial data to aid his analysis:

Data item 2012 value Earnings per share (EPS) $6.25 Price per share of common stock
$40.00 Book value of common stock equity $60,000,000 Total common shares outstanding
2,500,000 Common stock dividend per share $4.00

Based on your analysis of the case study and research, respond to the following: What is
the firms current book value per share? What is the firms current P/E ratio? What is the current
required return for Encore stock? What will be the new required return for Encore stock assuming
that they expand into European and Latin American markets as planned? If the securities analysts
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 companys stock here.) Which valuation method
do you believe most clearly represents the true value of the Encore stock? Keep the following points
in mind when you write the case analysis: Identify the critical issues or problems in the case and
analyze the key facts related to the issues or problems. Discuss a tentative solution that addresses
the issues or problems and how you would implement your solution. Integrate information from the
textbook and independent research into your case analysis. Cite at least one reference from a recent
relevant online source (not Wikipedia). You must provide in-text references and complete citations
for all sources. Make sure the analysis paper is professionally presented. Remember your
audience. It is important to present your information as clearly and succinctly as possible. Do not
sacrifice thoroughness for brevity. Proofread your work carefully for grammar and spelling errors.
Write the case analysis in 3 pages in a Word document. Follow the APA style for writing, editing, and
citation of sources. Submit the document to the assignment dropbox