Question

Instructions: Here is some recent financial data for a number of companies. Net Income and # of shares outstanding are in thousands. L Brands (LR) Tapestry (TPR) PVH (PVH) The Gap (GPS) Abercrombie & Fitch (ANF) # shares Annual Income outstanding $644,000 319,930 $397,500 286,600 $746,400 77,300 $1,003,000 385,000 Stocks price per share $18.56 S25,49 $84.48 $16.23 $74,541 69,137 $14.37 1) For each of the above companies, compute a) earnings per share and b) the P/E ratio. Your answer should be calculated in an Excel workbook and you should use Excel formulas to do your calculations, I need to see all work, and the formulas will be the work". Be sure to label the results so I know which company is which. 2) As you answer these questions keep in mind that stock value (price) can be thought of as a function of profit, growth opportunities and risk. Your answers should identify which of those 3 factors seems prominent in the determination of the price of a stock. a) Look at L Brands and Tapestry. Which one would you want to own? Why would you want to own the stock you chose? Use the information you calculated above for part 1 to explain your answer. b) Look at The Gap and Abercrombie & Fitch. Both stocks are relatively inexpensive, both under $17.00 a share. What would motivate you to buy GPS? What would motivate you to buy ANF? Explain your answer in terms of profit, growth potential or risk. c) PVH has the highest stock price compared to the three other companies listed. What is it about the stock that is driving its higher value?

Instructions: Here is some recent financial data for a number of companies. Net Income and # of shares outstanding are in thousands. L Brands (LR) Tapestry (TPR) PVH (PVH) The Gap (GPS) Abercrombie & Fitch (ANF) # shares Annual Income outstanding $644,000 319,930 $397,500 286,600 $746,400 77,300 $1,003,000 385,000 Stocks price per share $18.56 S25,49 $84.48 $16.23 $74,541 69,137 $14.37 1) For each of the above companies, compute a) earnings per share and b) the P/E ratio. Your answer should be calculated in an Excel workbook and you should use Excel formulas to do your calculations, I need to see all work, and the formulas will be the work". Be sure to label the results so I know which company is which. 2) As you answer these questions keep in mind that stock value (price) can be thought of as a function of profit, growth opportunities and risk. Your answers should identify which of those 3 factors seems prominent in the determination of the price of a stock. a) Look at L Brands and Tapestry. Which one would you want to own? Why would you want to own the stock you chose? Use the information you calculated above for part 1 to explain your answer. b) Look at The Gap and Abercrombie & Fitch. Both stocks are relatively inexpensive, both under $17.00 a share. What would motivate you to buy GPS? What would motivate you to buy ANF? Explain your answer in terms of profit, growth potential or risk. c) PVH has the highest stock price compared to the three other companies listed. What is it about the stock that is driving its higher value?

Answer 1

21) Annual Income Shares outstanding Stock price per share EPS PE Annual Stock price Income/Shares per outstanding share/EPS Profit Growth opportunity risk LB TPR PVH GPS ANF 644000 397500 746400 1003000 74541 319930 286600 77300 385000 69137 18.56 25.49 84.48 16.23 14.37 2.01 1.39 9.66 9.22 18.38 8.75 6.23 13.33 1.08 13 2) 14 a) 15 I would like to Tapestry (TPR). It has lower PE ratio as compared to L Brands. Assuming, both companies are in same sector and market is correct in pricing the companies, LB is undervalued as compared to TPR. The market is assuming that the future growth opportunities for LB are less as compared to TPR, which makes LB more risky. Even though LB's profits (in EPS terms) are higher than TPR's, its effect might get overshadowed by future growth opportunities and risk. However, if growth opportunity and risk are same for both companeis, then I would pick GPS, since it quite undervalued, then I would pick LB since it is quite undervalued when compared to TPR. Furthermor, a PE of above 18 may also be too high for some sectors, which means it is overvalued. Even though GPS's income is much higher than that of ANF, it's PE is very low as compared to ANF. There is a possibility that GPS is a mature company and its glory days are behind it, so there are no growth opportunity,which makes the company riskier. So, I would like to pick ANF. However, if growth opportunity and risk are same for both companeis, then I would pick GPS, since it quite undervalued when compared to ANF. PVH has the highest stock price, primarily due to its higher income, which is translating into higher EPS. Current income is also giving an indication that the future growth opportunities are also good. 19 b) 22 ) 23 24