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Valuing stocks
Three analyst reports were sent to an investment adviser about Vegas Chips, Inc., a young, growing company. The reports depicted the company as speculative but had different projections for future earnings and dividend growth rates. All three reports showed that in the last year, Vegas Chips earned $1.20 per share and that a fair return for investors is 14%. Management also expects to consistently earn a 15% return on book value. The variable growth model should be used to value the stock since the company's dividend growth rate is expected to vary, with rapid growth in the first few years becoming constant later.
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Valuing stocks
- 1. Valuing Stocks GROUP 5 Mini-Case(Page 179) Tuesday Evening Class Idrish Khan Andrew Tomasi Sheba Cavu Lisa Levy-Dakuna Vinita Prasad
- 2. Mini Case StudySummary Your Investment adviser has sent you three analyst reports for a young , growing company named Vegas Chips, Incorporated . These reports depict the company as speculative, but each one poses different projection of the company’s future growth rate in earnings and dividends. All three reports show ; Vegas Chips earned $1.20 per share in the year just ended. There is consensus that a fair rate of return to investors for this common stock is 14% That management expects to consistently earn a 15% return on the book value of equity (ROE = 15%)
- 6. Question 3 The companyshould use the Variable Growth Model to value its stock Variable growth Model is used because the company’s dividend growth rate varies It is also indicates a rapid growth rate in the first few years Becomes constant thereafter
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- 9. Question 4 Conclusion : AuditedAnnual Financial statement Percentage of market share Projections, forecasts, budget Business plan List of competitors and estimated annual billings in the Target’s market areas Legal litigation against the company.
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Editor's Notes
- #2 Size of Vegas Chips – declare of Roe 15% means medium reliance on share funding also relates $1.2 per share Growing corporation – will increase in coming years
- #4 Q1. The Analyst who produce report A makes the assumption that Vegas Chips will remain a small, regional company that, although profitable , is not expected to grow In this case, Vegas Chips management is expected to elect to pay out 100% of earnings as dividends.
- #5 Q2. The analyst who produced report B makes the assumption that Vegas Chips will enter the national market and grow at a steady, constant rate. In this case, Vegas Chips management is expected to elect to pay out 40% of earnings as dividends. The analyst discloses news that this dividend has just been committed to current stockholders.
- #7 Q3. The analyst who produced report also makes the assumption that Vegas Chips will enter the national market but expects a high level of initial excitement for the product that is then followed by growth at a constant rate. Earnings and dividends are expected to grow at a rate of 50% over the next year, 20% for the following two years and then revert back to a constant growth rate of 9% thereafter. The analyst also discloses that Vegas Chips’ management has just announced the pay out of 40% of the recently reported earnings to current stockholders. What model can you use to value a share of common stocks
- #10 Q4.Discuss the features (s) that drive the differing valuations of Vegas Chips. What additional information do you need to garner confidence in the projections of each analyst report?In conclusion, the various features that drive the deferring valuations of Vegas Chips are mainly the varying growth rates and future earnings expectation from shareholders. It’s difficult to predict future as we all know future is uncertain. As such, historical data may provide more insight of the company and may provide the basis to determining the future growth although the leak between the two is at time weak. In order to gain more confidence, we may need to request the following addition information, which is described below