ashionBunker (FBK) is a high-end fashion retailer, specialises in Australian designer brands. The company has moderate presence through physical stores but has built a strong digital brand, with sales extending to the US market and endorsements from international celebrities as well as Australian influencers. Using the last 2 years of daily data, the company is reported to have a beta of 1.3 compared to the ASX200. The annual risk-free interest rate is 2% and the expected rate of return on the market is 12% p.a. The price of FBK at the beginning of the year (2020) was $20. A dividend is expected to be paid of $0.50 per share at the end of year.

Question 31 Equity Analysis (14 marks)

A) What price do investors expect the stock to sell for at the end of the year if they believe in the CAPM? (Keep the answer to the nearest 2 decimal places) (3 marks)

B) An analyst has forecast the following for FBK: Due to the coronavirus, FCFE will drop by 7% every year for the next two years (year 2021 and 2022), after which FCFE is expected to grow at 6% per year forever.

B1) The FCFE of the company at the end of the year (2020) is expected to be $500 million with 450 million shares outstanding. What is the fair value per share at the beginning of 2020 according two-stage growth model? (Keep the answer to the nearest 2 decimal places) (4 marks)

B2) Assume that the firm applies a plowback ratio of 0.5 before paying dividend end of this year (2020), using the answer from question B1, what is the firms PVGO at the beginning of 2020? (Keep the answer to the nearest 2 decimal places) (2 marks)

B3) you intend to buy the stock at the end of 2020. Your friend believes that the firm will fail to achieve any forecasted growth (g=0). What will be the P/E ratio of FBK at the end of this year, assuming market price follows CAPM (round up to 2 decimal places). How long does he think you should expect to recover your initial investment by dividends, ignoring time value of money and capital gain? (Answer in years and rounded to the nearest integer) (3 marks)

C) Do you think FBK belongs to a defensive or cyclical sector? Why? (2 marks)