390 Part Four Evaluating Inosrmest Opportsmities 10. Scotts Miracle-Gro is the w

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390 Part Four Evaluating Inosrmest Opportsmities 10. Scotts Miracle-Gro is the world's leading supplier and marketer of do-it-yourself lawn and garden products; it is located in Marysville, Ohio. Although Scotts dominates many of its chosen markets, its profit margins are mediocre. Use the following information on Scotts and five other similar companies to stock on November 1, 2007 value Scotts' common Scotts Miracle-Gro (S millions Net income Number of common shares (millions) Earnings before interest and tax Tax rate Book value of equity Book value interest-bearing debt 113.4 3.9 156 479.3 1,118 Central Energizer Fortune Kimberly Newell Miracle-Gro Garden& Pet Holdings Brands Clark Rubbermaid Comparison of Scotts Miracle-Gro with Comparable Companies 5-year growth rate in sales (%) 5-year growth rate in EPS (%) Analysts' projected growth (%) Interest coverage ratio (X) Total liabilities to assets (X) Total assets (S millions) (3.0) 3.1 9.3 6.5 0.67 6,591 8.5 6.1 14.1 21.1 13.5 20.2) 6.1 10.3 .5 2.1 0.53 1,647 11.5 0.65 0.73 3,553 15,055 18,324 4.7 0.79 0.82 Indicators of Value Price/earnings (X) MV firm/EBIT( Tax rate) X) MV equity/sales (X) MV firm/sales (X) MV equity/BV equity (X) 21.5 18.2 0.3 0.7 20.2 1.8 2.3 9.5 2.2 19.1 15.3 16.8 17.1 16.5 1.6 22 2.0 6.9 17.8 1.2 5.9 3.6 1.5 MV firm/BV firm (X) 0.7 1.2 Mean value of security analysts' long-run estimates Available at reuters.com/finance/stocks. My - Market valuc. BV -Book valut. Market vale is estimated as book value of interest-bearing debt+ market valoe of equity. Earnings are fiscal year earnas 11. Following is a four-year forecast for Torino Marine Year 2015 2016 2017 2018 Free cash flow (S millions)-52 76 92 112

Explanation / Answer

1) Calculation of Price/Earnings Ratio Formula for price earning ratio is Book value per share / earning per share a) Net Income $ in Mio 113.4 b) No. of Common shares Mio 63.9 c) Earnings Per Share (EPS) (a/b) $1.77 / Share d) Book Value per Share $ $7.5 / Share (Book Value of Equity / No. of Shares) e) Price Earning Ratio (d/c) 4.23 f) Cost of Equity c/d 23.33% (for usage in 2nd part of question 2) Calculation of Value of the Firm/(EBIT*(1-Tax rate)) Market value of the Equity = (EBIT - Interest ) / Ke Interest Calculation Given Interest Coverage Ratio i.e. (EBIT/Interest Expense) 2.7 Interest = EBIT/2.7 or 156 / 2.7 $ $58 Mio By Substituing "Interest" value in Market value of Equity formula Market Value of Equity = $ 415 Million Value of Debt $ 1118 Million Market Value of the Firm = (Value of Debt + Value of Equity) $ 1533 Million Market Value of firm/(EBIT*(1-Tax rate)) 16.38 Formula for Book value of firm / EBIT (1-Tax Rate) a) Book Value of Equity $ in Mio 479.3 b) Value of Debt $ in Mio 1118 c) Book value of the Firm a) + b) 1597.3 d) EBIT*(1-Tax rate) $ in Mio 93.6 (i.e. 156 (1-40%)) Value of firm/(EBIT*(1-Tax rate)) c)/d) 17.06517 4) Calculation of Price/Earnings Ratio (based on Market Value of the equity) Market Value per Share($415.3Million/63.9Million Shares) $ 6.5 EPS $ 1.77 Market Price /Earning Ratio 3.66 5) MV Equity / BV Equity ($415Million/$479Million) 0.87

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