2021 ACFI 385 Managerial Finance CASE 2 THis Corp.

In the world of soft drinks THis Corp is a new and up and comer. The company has been on a journey trying to find a foothold in it distribution chain. Recently the company hired a maverick in the marketing industry by the name of Tom Curry. The companys product does not seem to be much different from the much larger competitors but the company has decided to follow the microbeverage manufacturers and offer a different line of beverages. With the help of John Smith, Tom Curry saw the sales of his company rocket to $500 million in sales after 5 years in business. His company gave carbonated beverage drinkers something different, they do not provide a diet soda nor a corn syrup product. What Tom found was that there was a niche for a beverage with less sweetness, half the calories, all natural ingredients and a vast array of flavoring.

THis Corp. had made it. The companys historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that THis Corp. could not keep up the pace. They warned that competition in this space was going to get fierce and that the firm might encounter little to no growth in the future. They estimated that stockholders also should expect no growth in future dividends.

Contrary to the conservative securities analysts, Mr. Attoms feels that the company could maintain a constant annual growth rate in dividends per share of 5.5% in the future, or with further expansion into chain restaurants and going global, the dividend could possibly reach 8% for the next 2 years and 6.5% thereafter. Mr. Stephens based his estimates on an established long-term expansion plan throughout the United States, Canadian and Mexican 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 0.85 to 1.65.

In preparing the long-term financial plan, THis Corps chief financial officer, Mr. Johnson, has assigned a junior financial analyst, Scot Robonson, to evaluate the firms current stock price. He has asked Scot to consider the conservative predictions of the securities analysts and the aggressive predictions of the company president.

The 2020 financial data is below to aid in the analysis:

Data item 2020 value Earnings per share

(EPS) $2.54 Price per share of common stock $21.20

Book value of common stock equity $125,000,000

Total common shares outstanding 12,500,000

Common stock dividend per share $2.68

Data Points Beta, b Required Return, K

0, 0.25%

0.25, 2.40%

0.5, 4.55%

0.75, 6.70%

1, 8.85%

1.25, 11.00%

1.5, 13.15%

1.75, 15.30%

2, 17.45%

To Do

a. What is the companys current book value per share?

b. What is the companys current P/E ratio?

c. (1) What is the current required return for the companys stock (use CAPM)?

(2) What will be the new required return for companys stock assuming that they expand into Other States, Canadian, and Mexican markets as planned (use CAPM)?

d. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the company stock? (Note: use the new required return on the companys stock here)

e. (1) If the analysts predictions are correct, what will be the value per share of the companys stock if the firm maintains a constant annual 5.5% growth rate in future dividends? (Note: Continue to use the new required return here.)

(2) What will be the value per share of the companys stock if the firm maintains a constant annual 8% growth rate in dividends per share over the next 2 years and 6.5% thereafter? (Note: Use the new required return here.)2021 ACFI 385 Managerial Finance

f. Compare the current (2020) price of the stock and the stock values found in parts a, d, and e1 and e2. Discuss why these values differ. Which valuation method do you believe most clearly represents the true value of the company, and Why