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Presentation/PPT
27/08/2022
The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelemen is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price on thestock. The company and its investment banks believe that the proper procedure is toselect several similar firms with publicity traded common stock and to make relevantcomparisons.Several jewelry manufactures are reasonably similar to Edelman with respect toproduct mix, asset composition, and debt/equity proportions. Of these companiesKennedy Jewelers and Strasburg Fashions are most similar. When analyzing thefollowing data, assume that 2002 and 2007 were reasonably “normal” years for allthree companies—that is, these years were neither especially good nor especially bad in terms of sales, earnings, and dividends. At the time of the analysis, rRF was 8% and RPm was 4%. Kennedy is listed on the AMEX and Strasburg on the NYSE, while Edelman will be traded in the Nasdaq market.KennedyStrasburgEdelman (total)Earning per Share*2010 $4.50 $7.50 $1,200,000.00 2005 $3.00 $3.50 $816,000.00 Price per Share*2010 $36.00 $65.00 ——————- Dividends per Share*2010 $2.25 $3.75 $600,000.00 2005 $1.50 $2.75 $420,000.00 Book Value per Share, 2010* $30.00 $55.00 $9. million ——120%118%——————Total assets, 2010$28. million$82. million$20. million$11 million$121. million$30. million$11. millionSales, 2010$41. million$140. million$37. million* The data are on a per share basis for Kennedy and Strasburg, but are totals for Edelmana. Assume that /Edelman has 100 shares of stock outstanding. Use this information tocalculate earnings per share (EPS), dividends per share (DPS), and book value pershare for Edleman. (hint: Edleman’s 2010 EPS = $12,000).2010Earnings per Share (EPS) $12,000 Dividends per Share (DPS) $4,200 Book Value per Share $90,000 b.Calculate earnings and dividends growth rates for the three companies. (Hint: Edelman’s EPS growth rate is 8%). Kennedy StrasburgEdelmanc.On the basis of your answer to part a, do you think Edelman’s stock would sell at a price in the same “ballpark” as that of Kennedy and Strasburg—that is, in the range of $25 to $100 per share?d.Assuming Edelman’s management can split the stock so that the 100 shares could bechanged to 1,000 shares, 100,000 shares, or any other number, would such an actionmake sense in this case? Why or why not?e.Now assume that Edelman did split its stock and has 400,000 shares. Calculate newvalues for EPS, DPS, and book value per share. (Hint: Edelman’s new 2010 EPS is $3.00.)f.Return on equity (ROE) can be measured either as EPS divided by book value per shareor as total earnings divided by total equity. Calculate ROEs for the three companies for2010. (Hint: Edelman’s 2010 ROE is 13.3%.)g.Calculate dividend payout ratios for the three companies for both years.(Hint: Edelman’s 2010 payout ratio is 50%.)h.Calculate debt/total assets ratios for the three companies for 2010.(Hint: Edelman’s 2010 debt ratio is 55%.)i.Calculate the P/E ratios for Kennedy and Strasburg for 2010. Are these ratios reasonablein view of relative growth, payout, and ROE data? If not, then what other factors mightexplain them? (Hint: Kennedy’s P/E = 8)j.Now determine a range of values for Edelman’s stock price, with 400,000 sharesoutstanding, by applying Kennedy’s and Strasburg’s P/E ratios, price/dividends ratios, and price/book value ratios to your data for Edelman. For example, one possible price for Edelman’s stock is (P/E Kennedy)(EPS Edelman) = 8($3) = $24 per share. Similar calculations would produce a range of prices based on both Kennedy’s and Strasburg’s data. (Hint: Our range was $24 to $27.)
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