Bailey Clothiers, Inc. Barbara Bailey, has always been fascinated by

 

Bailey Clothiers, Inc.

Barbara Bailey, has always been fascinated by the world of clothing. She left her previous job as vice-president of marketing and design to launch her own clothing firm. During the year of 20X9, her international company, Bailey Clothiers, grew to $ 200 million in sales after 10 years in business. Her fashion line covered all of the latest trends and designs from hats, sweaters, suits, sweatshirts, pants, socks and shoes. Her stores are located in business districts around the country and they have a strong social media presence.

Bailey Clothiers is doing very well. The company has grew very rapidly over the past few years that securities analysts were surprised by such growth. However, securities analysts are concerned that the company may not be able to keep up such a pace. They are concerned that competition is becoming more intense and that market saturation is a very real possibility. They estimated that stockholders also should expect much slower growth to no growth and they should not expect to receive any dividends in the future.

Barbara Bailey does not believe in analyst predictions. She feels that the company could maintain a constant annual growth rate in dividends per share of 6% in the future or possibly 8% for the next two years and 6% thereafter. Bailey is basing her estimates on an established long-term investment plan into the Latin American, European and Canadian Markets. By venturing into these markets the risk of the firm will increase. The company estimates that the risk premium will increase from 8.9% to 10%. Currently, the company has a risk premium of 6%.

In preparing the long-term financial plan, Bailey Clothiers’ chief financial officer has assigned financial analyst, Scott Markham, to evaluate the firm’s current stock price. He has asked Scott to consider the conservative predictions of the securities analysts and the aggressive predictions of Barbara Bailey.

Scott has compiled the following information from the 20X9 data to assist in his analysis:

Data: 20X9 Value

Earnings per share (E.P.S.) $ 5.25

Price per share of common stock 42.00

Book value of common stock equity $ 48,000,000

Total common shares outstanding 3,000,000

Common stock dividend per share $ 3.50

Required:

Please answer the following questions:

  1. What is the company’s current book value per share?
  2. What is the firm’s current P/E Ratio?
  3. What is the current required return for Bailey Clothiers’ stock?
  4. What will be the new required return for Bailey Clothiers’ stock assuming that they expand into the Latin American, European and Canadian markets as planned?
  5. Assuming that the securities analysts are correct in predicting that there is no growth in future dividends, what will be the value per share on Bailey Clothiers’ stock? (Note: Please use the new required return on the company’s stock here.)
  6. If Barbara Bailey’s predictions are correct, what will be the value per share of Bailey Clothiers’ stock if the firm maintains a constant annual 6% growth rate in future dividends? (Note: Please use the new required return to answer this question.
  7. If Barbara Bailey’s predictions are correct, what will be the value per share of Bailey Clothiers’ stock if the firm maintains a constant annual growth rate in dividends per share over the next 2 years and 6% thereafter?
  8. Compare the current (20X9) price of the stock and stock values found in parts A, E, F and G. Please discuss in (one paragraph) why there are differences in the values. Which valuation method do you believe most clearly represents the true value of Bailey Clothiers’ stock?