Reference no: EM132582146

In the world of high-end fashion, instinct and marketing savvy are prerequisites to success. Kim Kelvin had both. During 2019, her international casual-wear company, Trenz, rocketed to $300 million in sales after 10 years in business. Her fashion line covered the young woman from head to toe, all manufactured with sustainable and where possible, biodegradable product inputs. The business practices of Trenz encompassed elevating the economy, society and most importantly the environment in which it operated. Trenz shops were located in most major cities in Australia, New Zealand, Europe, UK and the USA.

Share valuation and expected growth

• The company's historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that Trenz could not keep up the pace. They warned that competition is fierce in the fashion industry and that the firm might encounter little or no growth in the future. They estimated that shareholders also should expect no growth in future dividends. Contrary to the conservative securities analysts, Kim Kelvin felt that the company could maintain a constant annual dividend growth rate of 6% per share in the future.

• Kim Kelvin based her estimates on an established long-term expansion plan into Asian and Latin American markets. Venturing into these markets was expected to cause the risk of the firm, as measured by beta, to increase immediately from 1.10 to 1.4. In preparing the long-term financial plan, Trenz's chief financial officer has assigned a junior financial analyst, Mark Walls, to evaluate the firm's current share price. He has asked Mark to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Kim Kelvin.

Mark has compiled these 2019 financial data to aid his analysis:

Data item                              2019 value

Earnings per share (EPS)       $6.25

Price per ordinary share         $40.00

Book value of share equity       $60,000,000

Total equity shares outstanding  $2,500,000 shares

Ordinary dividend per share               $4.00

You are required to:

Question 1) Calculate the company's current book value per share.

Question 2) Describe the Capital Asset Pricing Model (CAPM) and what it states to an investor. Calculate, the required return and risk premium for Trenz shares using the CAPM, assume a beta of 1.4.

Question 3) Calculate Trenz's value per share using the Constant dividend growth model, assuming Kim Kelvi's predictions are correct, that the firm maintains a constant annual 7% growth rate in future dividends. Assume a beta of 1.4.

Question 4) Compare the current price of the shares (2019) and the share values found in parts (1 to 3) and discuss why these values may differ. State which valuation method you believe most clearly represents the true value of Trenz shares?