CASE 2 Ryan International In the world of skateboard attire, instinct and market

Question

CASE 2 Ryan International In the world of skateboard attire, instinct and marketing savvy are prerequisites to success. Moogy Ellis had both. During 2017, his international skateboarding company, Ryan, rocketed to $700 million in sales after 10 years in business. His fashion line covered the skateboarders from head to toe with hats, shirts, pants, shorts, sweatshirts, socks, and shoes. In L.A., there was a Ryan shop every five or six blocks, each featuring a different color. Some shops showed the entire line in mauve, and others featured it in canary yellow. Ryan had made it. The company's historical growth was so spectacular that no one have predicted it. However, securities analysts speculated that Ryan could not keep up the pace. They warned that competition is fierce in the fad fashion industry and that the firm might encounter little or no growth in the future. They estimated that stockholders also should expect no growth in future dividends. could Contrary to the conservative securities analysts, Moogy Ellis feels that the company could maintain a constant annual growth rate in dividends per share of 8% in the future, or possibly 12% for the next 2 years and 8% thereafter. Ellis based his estimates on an established long-term expansion plan into European and Latin American markets. Venturing into these markets was expected to cause the risk of the firm, as measured by the beta on its stock, to increase immediately from 1.15 to 1.25. In preparing the long-term financial plan, Ryan's chief financial officer has assigned a junior financial analyst, Brad Harris, to evaluate the firm's current stock price. He has asked Brad to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Moogy Ellis.

Explanation / Answer

Soln : a)Book value per share = Book value/no. of shares outstanding = 75000000/2000000 = 37.5

b) Current P/E = current price per share/earning per share = 54.25/5 = 10.85

c) using CAPM model, we can calculate the present rate of return,r, from the data table, as it is given that Beta of stock =1.15

r = market rate *beta = (11-4)% * 1.15 + 4 = 12.05%...................we are assuming risk free rate = 4% as in date table risk free rate = 4% against Beta =0

2) Required rate of return lets say = K . If we use CAPM model, in that case Beta becomes = 1.25

So, rate of return , k= market return * beta = (11-4)%*1.25+4% = 12.75%

d) Dividend growth rate = 0, using dividend discount model, we can calculate value of stock, V

V = dividend per share /(required rate of return-dividend growth rate) = 2.35/0.1275.....................(since new required rate of return to be used)

V= $18.43 that will be the value of per stock.

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