Gulzar Ahmed (GA) is a mid-size company involved in textile business. The firm has been successful and has enjoyed a positive growth trend. Now the firm is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons. Several textile manufacturers are reasonably similar to Gulzar Ahmed with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Appolo Textiles and Hunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably “normal” in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. COMPANY DATA APOLLO HUNTER GULZAR SHARES OUTSTANDING 5,000,000 10,000,000 500,000 MKT. PRICE PER SHARE $36.00 $46.00 Not Avail EARNINGS PER SHARE $2.20 $3.13 $2.60 FREE CASH FLOW PER SHARE $1.63 $2.54 $2.00 BOOK VALUE PER SHARE $16.00 $20.00 $18.00 TOTAL ASSETS (in millions) $115.00 $250.00 $11.00 TOTAL DEBT (in millions) $35.00 $50.00 $2.00 Required: I. Using Apollo’s and Hunter’s P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for Gulzar Ahmed’s stock that would be consistent with these ratios. IV. What range of prices do you get? How does this compare with the price you get using the corporate valuation model?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Gulzar Ahmed (GA) is a mid-size company involved in textile business. The firm has
been successful and has enjoyed a positive growth trend. Now the firm is planning to go
public with an issue of common stock, and it faces the problem of setting an appropriate
price for the stock. The company and its investment banks believe that the proper
procedure is to conduct a valuation and select several similar firms with publicly traded
common stock and to make relevant comparisons.
Several textile manufacturers are reasonably similar to Gulzar Ahmed with respect to
product mix, asset composition, and debt/equity proportions. Of these companies,
Appolo Textiles and Hunter Fashions are most similar. When analyzing the following
data, assume that the most recent year has been reasonably “normal” in the sense that it
was neither especially good nor especially bad in terms of sales, earnings, and free cash
flows.
COMPANY DATA APOLLO HUNTER GULZAR
SHARES OUTSTANDING
5,000,000
10,000,000
500,000
MKT. PRICE PER SHARE $36.00 $46.00 Not Avail
EARNINGS PER SHARE $2.20 $3.13 $2.60
FREE CASH FLOW PER
SHARE $1.63 $2.54 $2.00
BOOK VALUE PER SHARE $16.00 $20.00 $18.00
TOTAL ASSETS (in millions) $115.00 $250.00 $11.00
TOTAL DEBT (in millions) $35.00 $50.00 $2.00
Required:
I. Using Apollo’s and Hunter’s P/E, Market/Book, and Price/FCF ratios, calculate
the range of prices for Gulzar Ahmed’s stock that would be consistent with these
ratios.
IV. What range of prices do you get? How does this compare with the price you
get using the corporate valuation model?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
