Corporate Finance

Group Assignment 1

Section E: Group 2

REEBY SPORTS

Submitted to – Dr. Avinash Ghalke

Submitted by –
Ami B Marfatia (202031002)
Akhil Ladha (202022029)
Mahima Okte (202022049)
Tapti Puglia (202021018)
Yashvardhan Kabra (202011039)

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 FOREWARD
This case is about Reeby Sports wishing to go public, so they want to calculate the share
price through different stock evaluation methods.

CASE ANALYSIS
The following Data is available to us which is as given below from year 2008 till year 2017.
From the case it is very clear that year 2008 till the year 2010 Reeby Sports’ is under growth
phase. While computing the values we ignore ROE & EPS which shows negative growth
rate.
As far as the year 2017 is concerned we will not use it for computing our values, the reason
for not including the same are:

Values Estimated

Figure 1: Data Table

To estimate the share value, we calculate Dividend Payout Ratio, Retention Ratio, ROE and
the average of the stated as per last 5 years.
Year 2012 2013 2014 2015 2016 Average of 5
years
EPS 1.10 1.30 1.52 1.64 2.00
Dividend 0.20 0.30 0.30 0.60 0.60
Book Value per share 8.51 9.51 10.73 11.77 13.17
ROE % 14.50 15.30 16.00 15.30 17.0 15.62
DPR 18.20% 23.10% 19.74% 36.60% 30% 25.53%
Retention Ratio 81.80% 76.90% 80.26% 63.40% 70% 74.47%

Average ROE % = 15.62 %

Average dividend pay-out ratio = 25.53 %
Average retention ratio = 74.47 %
Now, Growth = ROE * Retention ratio
Growth = (15.6 * 74.47) %

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 Growth= 11.62 %
When opportunities for investment disappears after six or eight years,
ROE = Cost of capital = 10 %
Growth = 10% * 74.47%
Growth = 7.45 %

Case 1: Opportunity for further profitable investment disappears after 6 years:

Growth (2017-22) = 11.62% and Growth (>2022) = 7.45%
Present value of dividends from year 2017 to 2022 is calculated as below:
Base Forecast
Year
Year 2016 2017 2018 2019 2020 2021 2022
Dividend 0.6 0.67 0.74 0.82 0.91 1.01 1.12
PV Factor @ 0.909 0.826 0.7513 0.683 0.6209 0.56447
10%
Discounted 0.6090 0.6112 0.61606 0.6215 0.62710 0.63220
dividend 3 4 6 3 9 6
PV of Dividend 3.7171814

Dividend (2023) = Dividend (2022) * 1.07 = 1.12 * 1.07 = $1.20

PV of dividends from year 2023 onwards = $1.20 / (10% - 7.45%) = 47 / (1 + 10%) ^6 =
$26.53
Current Share value = $26.53 + $3.72 = $ 30.25
Case 2: Opportunity for further profitable investment disappears after eight years:
Present value of dividends from year 2017 to 2024 is calculated as below:
Base Forecast
Year
Year 2016 2017 2018 2019 2020 2021 2022 2023 2024
Dividend 0.60 0.67 0.74 0.82 0.91 1.01 1.12 1.25 1.38
PV Factor @ 0.909 0.826 0.7513 0.683 0.6209 0.56447 0.513 0.4665
10%
Discounted 0.6090 0.61124 0.61606 0.6215 0.62710 0.63220 0.6412 0.6437
dividend 3 6 3 9 6 5 7
PV of Dividend( 2018 - 5.0022014
2024)

Dividend (2025) = Dividend (2024) * 1.07 = $1.48

PV of dividends from year 2025 onwards = $1.48 / (10% - 7.45 %) = 58 / (1 + 10%) ^8 =
$27.05
Current value per share = $27.05 + $5.00 = $32.05

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 CONCLUSION
Q1. Help Jenny to forecast dividend payments for Reeby Sports and to estimate the value of
the stock. You do not need to provide a single figure. For example, you may wish to calculate
two figures, one on the assumption that the opportunity for further profitable investment
disappears after 6 years and another assuming it disappears after 8 years.
Ans: As per our above analysis, the value of the stock –
 Investment disappear after 6 years - $ 30.25
 Investment disappear after 8 years - $ 32.05
Q2. How much of your estimate of the value of Reeby’s stock comes from the present value
of growth opportunities?
Ans: The present value of growth opportunities –
 For 6 years @ Growth at 11.62% = $ 3.72
 For 8 years @ Growth at 11.62% = $ 5.00

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