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Chapter 7 market based valuation price and enterprise

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Chapter 7Market-Based Valuation: Price and Enterprise Value Multiples5117. Kirstin Kruse, a portfolio manager, has an important client who wants to alter the com-position of her equity portfolio, which is currently a diversified portfolio of 60 globalcommon stocks. Because of concerns about the economy and based on the thesis that theconsumer staples sector will be less hurt than others in a recession, the client wants to adda group of stocks from the consumer staples sector. In addition, the client wants the stocksto meet the following criteria:Stocks must be considered large cap (i.e., have a large market capitalization).Stocks must have a dividend yield of at least 4.0 percent.Stocks must have a forward P/E no greater than 15.The following table shows how many stocks satisfied each screen, which was run in July2008.ScreenNumberSatisfyingConsumer staples sector277Large cap (>$9.7 billion in this database)446Dividend yield of at least 4.0%1,609P/E less than 152,994All four screens6The stocks meeting all four screens were Altria Group, Inc.; British American Tobacco(the company’s ADR); Reynolds American, Inc.; Tesco PLC (the ADR); Unilever N.V.(the ADR); and Unilever PLC (the ADR).A. Critique the construction of the screen.B. Do these criteria identify appropriate additions to this client’s portfolio?Questions 18–24 relate to Mark CannanMark Cannan is updating research reports on two well-established consumer companies be-fore first quarter 2011 earnings reports are released. His supervisor, Sharolyn Ritter, has askedCannan to use market-based valuations when updating the reports.Delite Beverage is a manufacturer and distributor of soft drinks and recently acquired amajor water bottling company in order to offer a broader product line. The acquisition willhave a significant impact on Delite’s future results.You Fix It is a United States retail distributor of products for home improvement, primarilyfor those consumers who choose to do the work themselves. The home improvement industryis cyclical; the industry was adversely affected by the recent downturn in the economy, the levelof foreclosures, and slow home sales. Although sales and earnings at You Fix It weakened, samestore sales are beginning to improve as consumers undertake more home improvement projects.Poor performing stores were closed, resulting in significant restructuring charges in 2010.Before approving Cannan’s work, Ritter wants to discuss the calculations and choices ofratios used in the valuation of Delite and You Fix It. The data used by Cannan in his analysisis summarized in Exhibit 1.
52Part I: Learning Objectives, Summary Overview, and ProblemsEXHIBIT 1Select Financial Data for Delite Beverage and You Fix ItDelite BeverageYou Fix It2010 Earnings per share (EPS)$3.44$1.772011 estimated EPS$3.50$1.99Book value per share end of year$62.05$11.64Current share price$65.50$37.23Sales (billions)$32.13$67.44Free cash flow per share$2.68$0.21Shares outstanding end of year2,322,034,0001,638,821,000Cannan advises Ritter that he is considering three different approaches to value the sharesof You Fix It:Approach 1Price-to-book (P/B) ratioApproach 2Price-to-earnings (P/E) ratio using trailing earningsApproach 3Price-to-earnings ratio using normalized earningsCannan tells Ritter that he calculated the price-to-sales ratio (P/S) for You Fix It, butchose not to use it in the valuation of the shares. Cannan states to Ritter that it is more appro-

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Term
Fall
Professor
NoProfessor
Tags
Test, Dividend yield, analyst

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