Topic_7_E2 - How might investors make money if they picked...

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Topic 7 Exercise 2 Appropriate Valuation for Krispy Kreme Everybody wants Krispy Kreme! Donuts? No, stock! The price/earnings ratio for Krispy Kreme has been, like the donuts, heavenly--or in the heavens, up 600% since its IPO in April, 2000! What is it that drives the value for companies that have popular products or services? Read "The KREMEY Warning for Krispy Kreme," BusinessWeek , December 9, 2002, and answer the following questions. 1. What does the author reference or use to support his conclusion that Krispy Kreme is overvalued? The author is concerned with the decline in the growth rate of earnings relative to the forward P/E ratio and that it is a business that is easy to for others to duplicate, like coffee shops. The P/E is considerably higher than other "popular" company stocks, such as Starbucks. 2. Assuming of course that the market is efficient, what fundamentals explain Krispy Kreme's market capitalization level (stock price)?
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Unformatted text preview: How might investors make money if they picked up the BusinessWeek with this article in it early in the week? Finance fundamentals note that the value of the company is the PV of future cash flows (dividends or from a greater fool buying my stock) discounted at the required rate of return. We can likely rule out a low capitalization rate, though donut demand is probably as steady as the average weight-gain statistics of Americans. The key is meeting the markets' expectations (earnings) and KK seems to have done that. While growth rates are declining, they are still in the thirty percent range and may account for much of the lofty P/E, though few investors like to pay for the forty-second year of earnings! (P/E ratio of 42) International growth may be the key, but donuts and coffee may not be as popular in China, India and other populous countries....
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