Encore Internationaln the world of trendsetting fashion, instinct and marketing savvy are prerequisitespany, Encore, rocketed to $300 million in sales after 10 years in business. His fash-ion line covered young women from head to toe with hats, sweaters, dresses,blouses, skirts, pants, sweatshirts, socks, and shoes. In Manhattan, an Encore shopwas found every five or six blocks, each featuring a different color. Some shopsshowed the entire line in lapis blue, and others featured it in grenadine.Encore had made it. The company's historical growth was so spectacular thatno one could have predicted it. However, securities analysts speculated that Encorecould not keep up the pace. They warned that competition is fierce in the fashionindustry and that the firm might encounter little or no growth in the future. They es-timated that stockholders also should expect no growth in future dividends.Contrary to the conservative securities analysts, Jordan Ellis believed that thecompany could maintain a constant annual growth rate in dividends per share of6% in the future, or possibly 8% for the next 2 years and 6% thereafter. Ellis basedhis estimates on an established long-term expansion plan into European and LatinAmerican markets. Venturing into these markets was expected to cause the risk ofthe firm, as measured by the risk premium on its stock, to increase immediately from8.8% to 10%. Currently, the risk-free rate is 6%.In preparing the long-term financial plan, Encore's chief financial officer has as-signed a junior financial analyst, Marc Scott, to evaluate the firm's current stockprice. He has asked Marc to consider the conservative predictions of the securitiesanalysts and the aggressive predictions of the company founder, Jordan Ellis.Marc has compiled the following 2019 financial data to aid his analysis.Data itemEarnings per share (EPS)Price per share of common stockBook value of common stock equityTotal common shares outstandingCommon stock dividend per shareTO DOa. What is the firm's current book value per share?b. What is the firm's current P/E ratio?2019 value$6.25$40.00$60,000,0002,500,000$4.00c. (1) What is the current required return for Encore stock?(2) What will be the new required return for Encore stock, assuming that thefirm expands into European and Latin American markets as planned?d. 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 newrequired return on the company's stock here.)343 89263 916109e. (1) If Jordan Ellis's predictions are correct, what will be the value per share ofEncore stock if the firm maintains a constant annual 6% growth rate infuture dividends? (Note: Continue to use the new required return here.)(2) If Jordan Ellis's predictions are correct, what will be the value per share ofEncore stock if the firm maintains a constant annual 8% growth rate in dividends per share over the next 2 years and 6% thereafter?f. Compare the current (2019) price of the stock and the stock values found inparts a, d, and e. Discuss why these values may differ. Which valuation methoddo you believe most clearly represents the true value of the Encore stock?PART THREE Valuation of Securities

Information Provided: EPS = $6.25 Common stock price per share = $40.00 Book value of common equity…

a. What is the firm's current book value per share? b. What is the firm's current P/E ratio? c. (1) What is the current required return for Encore stock? (2) What will be the new required return for Encore stock, assuming that the firm expands into European and Latin American markets as planned?

a. What is the firm's current book value per share? b. What is the firm's current P/E ratio? c. (1) What is the current required return for Encore stock? (2) What will be the new required return for Encore stock, assuming that the firm expands into European and Latin American markets as planned?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 5PA: Crawfords Books and Things has a traditional bookstore housed downtown Charlotte. The store has been...

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