GEC Corporation, which markets cleaning chemicals, insecticides and other products, paid dividends of $2.4 per share in 2006 on earnings of $4.00 per share. The book value of equity per share was $40.00. Starting from 2007 earnings are expected to grow 6% a year steadily and ROE will remain on the current level. The stock has a beta of 0.9, and sells for $60 per share. (The treasury bond rate is 6%, market risk premium is 4%.)
a. Based upon these inputs, estimate the price/book value ratio for GEC.
b. How much would the return on equity have to increase to justify the price/book value ratio at which NCH sells for currently?
2. You have run a regression of Value/Sales Ratio against after-tax operating margins for cosmetics firms:
Value/Sales = 0.45 + 8.5 (After-tax operating margin)
You are trying to estimate the brand name value of SuperCosmetics. The firm earned $60 million before interest and after taxes on revenues of $ 480 million. In contrast, GenCosmetics, a manufacturer of generic cosmetics had an after-tax operating margin of 4%. Estimate the brand name value for SuperCosmetics.
3. Global Flavors and Fragrances, a leading creator and manufacturer of flavors and fragrances, paid out dividends of $0.80 per share on earnings per share of $1.60 in 2006. The firm is expected to have a return on equity of 20% between 2007 and 2011, after which the firm is expected to have stable growth of 4% a year (the return on equity is expected to drop to 15% in the stable growth phase). The dividend payout ratio is expected to remain at the current level from 2007 to 2011. The stock has a beta of 1.20, which will be changed to 1 after 2011. The treasury bond rate is 6% and market risk premium is 4%. Estimate the P/E ratio for International Flavors.
4. HealthDrug, a U.S. drugstore had sales per share of $80 in 2006, on which it reported earnings per share of $1.60 and paid a dividend per share of $0.80. The company is expected to grow 6% in the long term, and has a beta of 0.90. The current T.Bond rate is 6% and the market risk premium is 4%
a. Estimate the appropriate price/sales multiple for HealthDrug.
b. The stock is currently trading for $28 per share. Assuming the growth rate is estimated correctly, what would the profit margin needed to be to justify this price per share.
The solution determines the stock, PE ratio, ROE, price/book value and profit margin.