Story brook, Inc. is currently selling for $25.50, with trailing EPS and dividends of $2.25 and $1.31, respectively. The company’s P/E is 11.3, P/B is 7.1, and P/S is 4.3. The ROE is 21 percent, and the profit margin on sales is 8.25 percent. The Treasury bond rate is 2.45 percent; the equity risk premium is 6.30 percent, and Story brook’s beta is 2.1.
a. What is Story brook’s required rate of return, based on the capital asset pricing model (CAPM)?
b. Assume that the dividend and earnings growth rates are the same and can are a function of ROE. What trailing P/E, P/B and P/S would be justified in light of the required rate of return in part A and current values of the dividend payout ratio, ROE and profit margin?
c. Given that the assumptions and constant growth model are appropriate, state and justify whether Story brook, based on fundamentals, appears to be fairly valued, overvalued, or undervalued.