Awesome Inc. was founded a few years ago by two friends, Bob and Sam. The company is equally owned by Bob and Sam. The original partnership agreement between them gave them each 50,000 shares of stock. The company manufactures and installs commercial heating, ventilation, and cooling units. Sam and Bob are engineering graduates and have developed proprietary technology that increases the energy efficiency. Awesome Inc. has experienced rapid growth because of this proprietary technology Recently, Bob and Sam have been discussing the possibility of selling their company. Although they don't need the money immediately, they may sell their holdings if they get a good price. Hence, they have decided that they should value their holdings in the company. Alongside their engineering courses, Bob and Sam also took courses in accounting and finance. Based on the financial statements from last year, Bob and Sam calculated that Awesome Inc. had an EPS (carnings per share) of $5.24 and paid a dividend of $ 1.26 per share. The company also had ROE (return on equity) of 24% and they also believe that 20% is an appropriate required rate of return for their company. In order to get an expert opinion, they hire Joe, who is an expert equity analyst. Joe gathers the following information about Awesome Inc.'s main competitors: Famings Per Share Dividend Per Share Stock Price Return on Equity Required Rate ABC Inc. EFG Ltd. XYZ Corp Average $0.70 $ 1.30 $1.00 $1.00 $ 0.20 $0.62 50.38 $0.40 $ 14,00 $ 11.87 $13.13 $13.00 12.00% 13.00% 14.07% 13.00% 11.00 13.00 12.00 12.00% Joe thinks that Awesome Inc.'s technological advantage will last only for the next four years. After that, the company's growth will likely slow to the industry growth average. Additionally, Joe believes that Bob and Sam have miscalculated the required rate of return and it should actually be equal to the industry average required rate of return. Based on the information given above and your knowledge, answer the following questions: Dividend discount model and comparables/multiples method are two common techniques used to value stocks. Compare and contrast these techniques, Calculate the value of Awesome Inc.'s stock in the following cases: Assuming that Bob and Sam are correct, and the company continues to grow at its current growth rate forever what is the value per share? Assuming that Joe is correct, what is the value per share? Calculate the value per share using the comparables/multiples method. Comment on the differences that you see from the calculation of the value per share. Do you think that the technological advantage possessed by Awesome Inc. plays any role in its valuation? Do you think such an advantage can last forever? Great Inc. is thinking about acquiring Awesome Inc. Great Inc. is willing to offer $60 per share to Bob and Sam to give up their entire holdings. Based on your analysis so far, would you recommend Bob and Sam to take this offer? Explain
