1. What conclusion(s) are indicated by the ratio analysis?

2. What is the firms current payout ratio compared to its historical payout ratio?

3. What are the annual growth rates in the earnings per share and the dividend?

4. Is there any reason to believe that the firm has changed its dividend policy?

5. Risk is affected by many factors. How may each of the following affect the firm-specific (unsystematic) risk associated with Dentex?

a) The firms geographical location

b) Its product line

c) Its use of debt financing

d) Foreign competition

6. Does Dentexs P/E ratio suggest the firm is undervalued?

7. Why is the growth rate in the dividend not sustainable?

8. If a dividend growth rate of 4 percent can be sustained, is the stock a good purchase if the required return is 9.5 percent?

9. If the beta coefficient were 0.8 and the sustainable growth is assumed to be 4 percent, should the stock be purchased if the risk-free rate is 3.5 percent and the anticipated return on the market is 9.5 percent?

MINI CASE 

H.B. Babalola often observed that the clothes worn by his daughters and their friends were made of denim. No matter what the style, blue jeans and other clothes made of denim were popular. While certain styles would remain popular for only brief periods, the use of denim continued year after year. Babalola reasoned that the manufacturers of denim may be potentially attractive investments, as there appeared to him to be little fluctuation in the demand for denim. Babalola discovered that the primary manufacturer of denim was Dentex, a textile mill in North Carolina. Dentex specializes in denim and produces only a modest amount of other types of cloth. Its sales of denim account for one-third of the total denim market both domestic and abroad. Dentexs balance sheets and income statements for the last two years are presented in Exhibit 1. Dentexs per-share earnings and dividends are given in Exhibit 2. With the exception of the most recent year, 2007, and 2004, per-share earnings have steadily increased, and dividends have risen every year for the last ten years. This pattern of earnings and dividend growth impressed Babalola, who tended to think of textiles as a dull industry with little growth potential.