Comment on consistency of market valuation

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Reference no: EM132009281

Please advise me about the following case study.

Higher Health Precision Tools Pty Ltd is (HHTP) is currently a small engineering company that has an emerging reputation as a specialist tooling provider for health equipment manufacturers. A similar, but somewhat bigger publicly listed company operating in Japan has been identified – and HTTP aspires to match its performance. The following information is available for the company:

o It has debt to equity ratio of 1:4.6

o Yahoo finance has quoted a beta for it of 1.5

o It has current share price of ¥141.13, and a price to earnings ratio of 4.1

o It has not been paying any dividends over the last five years as it has invested in forthoming growth, and will continue to do that over the next three years (ie end of 2018 -2020). Then it expects to pay a dividend of ¥13 (end of 2021), and then increase it to ¥23, after which it expects the company to stabilise and dividends to grow with inflation

Based on this information, comment on the consistency of the market valuation of the company and its implications for HTTP.

Using this information as a base, and an acknowledgement that HTTP recognises it has limitations in using debt and as such will at best have 20% of its balance sheet funded by debt in the long term – provide advice as to the cost of capital to be used as a discount rate in company and project valuations.

Reference no: EM132009281

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