Problem 1: 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?
Problem 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.
Problem 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.
Problem 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.