Evaluate the extent of markets mispricing of steak n shake

Assignment Help Financial Accounting

Reference no: EM13902017

USING MARKET MULTIPLES TO ASSESS VALUES AND MARKET PRICES. Problem 13.18 and Exhibit 13.7 in Chapter 13 present selected data from projected financial statements for Steak 'n Shake for Year +1 to Year +11. The amounts for Year +11 reflect a long-term growth assumption of 3 percent. The cost of equity capital is 9.34 percent. The market value of common shareholders' equity in Steak 'n Shake on January 1, Year +1, is $309.98 million.

Required

a. Compute the value-to-book ratio as of January 1, Year +1, using the residual ROCE valuation method.

b. Using the analyses developed in Part a, prepare an exhibit summarizing the follow- ing ratios for Steak 'n Shake as of January 1, Year +1:

1. Value-to-book ratio (using the amounts from Part a)

2. Market-to-book ratio

3. Value-earnings ratio, using reported earnings for Year 0 of $21.8 million

4. Price-earnings ratio, using reported earnings for Year 0 of $21.8 million

5. Value-earnings ratio, using projected earnings for Year +1 of $24.5 million

6. Price-earnings ratio, using projected earnings for Year +1 of $24.5 million

c. Compute the risk-neutral value of Steak 'n Shake as of January 1, Year +1, using a risk-free rate of 4.2 percent. Use the projected earnings for Year +1 to Year +10 and the projected earnings for Year +11 given in Exhibit 13.7. Maintain the continuing value growth assumption of 3 percent. Compute the price differential for Steak 'n Shake as of January 1, Year +1. Compute the ratio of market value to risk-neutral value for Steak 'n Shake as of January 1, Year +1.

d. Use reverse engineering to solve for the long-run growth rate in continuing residual income in Year +11 and beyond that is implicitly impounded in the market value of Steak 'n Shake on January 1, Year +1. Use the 9.34 percent cost of equity capital and the projected earnings amounts for Year +1 to Year +10 in Exhibit 13.7 before solv- ing for the long-run growth rate in continuing residual income.

e. Using the analyses in Parts a-d, evaluate the extent of the market's mispricing (if any) of Steak 'n Shake.

Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.

Reference no: EM13902017

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