R.A. Nixon put out a “strong buy” on DuPoTex (DPT). This company has a current stock price of $88.00 per share. The company has sales of $210 million, net income of $3 million, and 300 million outstanding shares. DPT is not paying a dividend. Dorothy Josephson has argued with Nixon that DPT’s valuation is excessive relative to its sales, profits, and any reasonable assumptions about future possible dividends. Josephson also asserts that DPT has a market value equal to that of many large blue-chip companies, which it does not deserve. Nixon feels that Josephson’s concerns reflect an outdated attitude about equity valuation and a lack of understanding about DPT’s industry.
What is the total market value of DPT’s outstanding shares?
What are the price to earnings ratio and price-to-sales ratios?
Nixon and Josephson have agreed on a scenario for future earnings and dividends for DPT. Their assumptions are that sales grow at 60 percent annually for four years, and then at 7 percent annually thereafter. In Year 5 and thereafter, earnings will be 10 percent of sales. No dividends will be paid for four years, but in Year 5 and after, dividends will be 40 percent of earnings. Dividends should be discounted at a 12 percent rate. What is the value of a share of DPT using the discounted dividend approach to valuation?