In the world of trendsetting fashion, instinct and marketing savvy are prerequisites to success. Michael Geno had both. During 2013, his international casual-wear company, International Fashion Company (IFC), 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 IFC shop every five or six blocks, each featuring a different color. Some shops showed the entire line in mauve, and other featured it in canary yellow.
IFC had made it. The company's historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that IFC 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, Martin Rudolph 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 3 years and 6% thereafter. Rudolph 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 10.0%. Currently, the risk-free rate is 6.0%.
In preparing the long-term financial plan, IFC's chief financial officer has assigned a junior financial analyst, Eric Dufay, to evaluate the firm's current stock price. He has asked Eric to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Michael Geno.
Eric has compiled these 2013 financial data to aid his analysis:
DATA ITEM 2013 VALUE
Earnings per share (EPS) $ 5.76
Current market price per share of common stock $ 51.90
Book value of common stock equity $ 55,980,000
Total common shares outstanding 2,105,000
Common stock dividend per share (paid in 2013) $ 1.78
Required:
A. What is the firm's current book value per share?
B. What is the firm's current P/E ratio?
C. What is the current required return for IFC Stock?
D. What will be the new required return for IFC stock assuming that they expand into European and Latin American markets as planned?
E. If Michael Geno's predictions are correct, what will be the value per share of IFC stock if the firm maintains a constant annual 6% growth rate in future dividends? (Note: Continue to use the new required return here.)
F. If Michael Geno's predictions are correct, what will be the value per share of IFC stock if the firm maintains a constant annual 8% growth rate in dividends per share over the next 3 years and 6% thereafter?
G. Compare the current (2013) market price of the stock and the stock values found in parts A, D, E, and F. Discuss why there values may differ. Which valuation method do you believe most clearly represents the true value of the IFC stock? Please be thorough in your discussion and support your answer.