Question

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 2019. Also assume that the firm’s equity beta is 1.20, the risk-free rate is 2.40 percent, and the market risk premium is 9.0 percent. Dividends per share $ 2.16 Return on equity 11.50 % Book value per share $ 17.95 Earnings Cash Flow Sales 2019 value per share $ 5.00 $ 6.50 $ 25.65 Average price multiple 13.10 9.48 2.42 Forecasted growth rate 13.54 % 11.35 % 7.04 % The required return is 13.20 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	$	2.16
Return on equity		11.50	%
Book value per share	$	17.95

	Earnings			Cash Flow			Sales
2019 value per share	$	5.00		$	6.50		$	25.65
Average price multiple		13.10			9.48			2.42
Forecasted growth rate		13.54	%		11.35	%		7.04	%

The required return is 13.20 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.)

Answer 1

a.

Sustainable growth rate = ROE*retention rate
ROE=11..50%
Retention = 1-(Dividend/EPS)
Retention = 1-(2.16/5.00)=0.568

SGR=11.50*0.568=6.532%

Required return = Rf+(Beta*risk premium)
=2.40+(1.20*9)
=13.2%

b) Price of stock = D1/(r-g)
D1=2.16+(1+SGR)
=2.16*1.0568
r-g=0.132-0.0568=0.0752
Price=2.16*1.0568/0.0752=$45.0383

c)On P/E basis=13.10*5.00*1.1354=$74.3687
On P/CF basis= 6.50*9.48*1.1135=$68.6138
On P/S basis= 25.65*2.42*1.0704=$66.4429