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To counter the loss of sunglass hut oakley added foot

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Unformatted text preview: d’s trendy looks. To counter the loss of Sunglass Hut, Oakley added Foot Locker and Champs athletic apparel stores to its distribution channels. Expanded product lines include other high-performance athletic gear, such as apparel, footwear, accessories, and prescription eyewear. Company executives are also creative; CEO Jim Jannard conducted the firm’s annual meeting wearing an Oakley specialty product—the Medusa, a leather helmet with mirrored goggles and braided strands. Wall Street watchers hoped that Oakley’s iconoclastic style would take the company to new heights, even without Sunglass Hut. Using the price-earnings (P/E ) multiple approach to estimate the firm’s share value, analysts calculated the share value would be $23.44 (analysts’ average estimated 2002 earnings of $0.80 a share times the recreational-products industry P/E of 29.3 on December 14, 2001). Said Eric Beder, an analyst at Ladenburg, Thallmann, “If Oakley can grow at 20 percent a year without Sunglass Hut, then this stock is worth double what it is now [August 2001] because this company is just touching the tip of the iceberg with its product lines.” The new products, retail outlets, and a 20 percent increase in international sales boosted Oakley’s third-quarter 2001 sales to record levels. In mid-December 2001, Oakley and Sunglass Hut signed a 3-year agreement to resume their business relationship. With the more optimistic earnings picture, by late March 2002 the stock valuation increased to $31.19 (analysts’ average estimated 2003 earnings of $0.97 a share multiplied by a P/E for the recreational products industry on March 27, 2002, of 32.15), which was considerably above the $17.90 level at which the stock had been trading. Stock valuation requires models that bring together cash flows (returns), timing, and the required return (risk). In this chapter we will examine the differences between debt and equity capital, describe the characteristics of common and preferred stock, and use several different valuation models to determine the value of common stock. P 307 308 PART 2 Important Financial Concepts LG1 7.1 Differences Between Debt and Equity Capital capital The long-term funds of a firm; all items on the right-hand side of the firm’s balance sheet, excluding current liabilities. debt capital All long-term borrowing incurred by a firm, including bonds. equity capital The long-term funds provided by the firm’s owners, the stockholders. The term capital denotes the long-term funds of a firm. All items on the righthand side of the firm’s balance sheet, excluding current liabilities, are sources of capital. Debt capital includes all long-term borrowing incurred by a firm, including bonds, which were discussed in Chapter 6. Equity capital consists of longterm funds provided by the firm’s owners, the stockholders. A firm can obtain equity capital either internally, by retaining earnings rather than paying them out as dividends to its stockholders, or...
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