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Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to...

Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values provided are from year-end 2015. Also assume that the firm’s equity beta is 1.40, the risk-free rate is 2.20 percent, and the market risk premium is 6.4 percent.

a. Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If The required return is 12.82 percent. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual income model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Dividends per share $ 2.64
Return on equity 10.00 %
Book value per share $ 17.30

Earnings Cash Flow Sales
2015 value per share $ 5.50 $ 6.85 $ 25.90
Average price multiple 13.60 9.57 2.56
Forecasted growth rate 13.58 % 11.66 % 7.64

%

Solutions

Expert Solution

Beagle Beauties

Equity beta = 1.40

Risk free rate = 2.20%

Market risk premium = 6.4%

  1. Current share price as per constant dividend model

Growth rate = 13.58 %

Cost of equity = Risk free rate + Equity beta * Market risk premium

                                = 2.20 % + 1.40 + 6.4%

                                = 2.20 % + 8.96%

Cost of equity    = 11.16%

                                = =

                        = 197.2697


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