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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.
All long-term borrowing incurred
by a firm, including bonds.
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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