Question

CASE 2 Ryan International In the world of skateboard attire, instinct and marketing savvy are prerequisites to success. Moogy Ellis had both. During 2019, his international skateboarding company, Ryan, rocketed to $900 million in sales after 10 years in business. His fashion line covered the skateboarders from head to toe with hats, shirts, pants, shorts, sweatshirts, socks, and shoes. In L.A., there was a Ryan shop every five or six blocks, each featuring a different color. Some shops showed the entire line in mauve, and others featured it in canary yellow. Ryan had made it. The company's historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that Ryan could not keep up the pace. They warned that competition is fierce in the fad 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, Moogy Ellis feels that the company could maintain a constant annual growth rate in dividends per share of 7% in the future, or possibly 9% for the next 2 years and 7% thereafter. Ellis 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 beta on its stock, to increase immediately from 1.3 to 1.5. In preparing the long-term financial plan, Ryan's chief financial officer has assigned a junior Financial analyst, Brad Harris, to evaluate the firm's current stock price. He has asked Brad to consider the conservative predictions of the securities analysts and the aggressive predictions of me company founder, Moogy Ellis.

Answer 1

A) Book value per share= Stock of equity/ Share outstanding = 60000000/5000000=12 So the value per share is 12

B) P/E ratio= Market Price/ Earning required return per share= 38/6.40=5.9375

C.1) Rate of return using CAPM = As the Beta 1.25= Required Return= 16.875 so if the beta is 1.3 is 17.55

C.2) If the business is expanded to latin markets so the growth will be by 7% so considering that we calculate it as: Rf + B(K-Rf) = 7+1.3*(17.55-7) =20.715   

D) The value of zero growth in dividends is calculated as: Dividend/Required return and for the year The dividends are 4.20 and required return is 20.715 so =4.20/20.715= 20.28 so the value of share will be Price per share + Growth= 38 +20.28= 58.28

E.1) If the growth rate is 7% and required return is 20.715 = 58.61 as the value per share is = Dividend/Required rate= 4.20+7% /20.715= 20.613+38 =58.61

E.2) If the growth rate is 9% and required return is 20.715= 58.70 as the value per share is= Dividend/ required rate= 4.20+9%/20.715= 58.70

F) The price in the initial stage was 12 as there was a increase in the growth of dividends every year by 7% and 9% for two constant year and when the company pays out dividend every year by considering growth so the price differentiated every year from 12 initially to 58.28 with zero/constant dividend, 7%, 9% growth rate and 58.28 and 58.61 respectively

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