Bailey Clothiers, Inc.

Barbara Bailey has always been fascinated by the world of clothing. She left her previous job as vice$-$president

of marketing and design to launch her own clothing firm. During the year of $20$X$9,$ her intemational company,

Bailey Clothiers, grew to $$200$ million in sales after $10$ years in business. Her fashion line covered all of the

latest trends and designs in hats, sweaters, suits, sweatshirts, pants, socks, and shoes. Her stores are located

in business districts around the country and they have a strong social media presence.

Bailey Clothiers is doing very well. The company has grown very rapidly over the past few years, surprising

securities analysts. These securities analysts are now concerned that the company may not be able to keep up

such a pace. They point to competition becoming more intense and feel that market saturation is a very real

possibility. They estimate that stockholders also should expect much slower$-$growth to no$-$growth and they

should not expect to receive any dividends in the future.

Barbara Bailey does not believe in analyst predictions. She feels that the company could maintain a constant

annual growth rate in dividends per share of $6\%$ in the future or possibly $8\%$ for the next two years and $6\%$

thereafter. Bailey is basing her estimates on an established long$-$term investment plan into the Latin American,

European, and Canadian Markets. By venturing into these markets the risk of the firm will increase. The

company estimates that the risk premium will increase to between $8\mathrm{.}9\%$ and $10\%.$ Currently, the company has

a risk premium of $6\%.$

In preparing the long$-$term financial plan, Bailey Clothiers' chief financial officer has assigned financial analyst,

Scott Markham, to evaluate the firm's current stock price. He has asked Scott to consider the conservative

predictions of the securities analysts and the aggressive predictions of Barbara Bailey.

Scott has compiled the following information from the $20$X$9$ data to assist in his analysis:

Data: $20$x$9$ Value

Earnings per share $($E$.$P$.$S$.)$: $$5\mathrm{.}25$

Price per share of common stock: $$42\mathrm{.}00$

Book value of common stock equity: $$48,000,000$

Total common shares outstanding: $3,000,000$

Common stock dividend per share: $$3\mathrm{.}50$

Required:

Please answer the following questions:

A$.$ What is the company's current book value per share?

B$.$ What is the firm's current P$/$E Ratio?

C$.$ What is the current required return for Bailey Clothiers' stock?

D$.$ What will be the new required return for Bailey Clothiers' stock assuming that they expand into the Latin

American, European, and Canadian markets as planned?

E$.$ Assuming that the securities analysts are correct in predicting that there is no growth in future dividends,

what will be the value per share on Bailey Clothiers' stock? $($Note: Please use the new required return on

the company's stock here.$)$

F$.$ If Barbara Bailey's predictions are correct, what will be the value per share of Bailey Clothiers' stock if the

firm maintains a constant annual $6\%$ growth rate in future dividends? $($Note: Please use the new required

return to answer this question.$)$

G$.$ If Barbara Bailey's predictions are correct, what will be the value per share of Bailey Clothiers' stock if the

firm maintains a constant annual growth rate in dividends per share over the next $2$ years and $6\%$

thereafter?

H$.$ Compare the current $(20$X$9)$ price of the stock and stock values found in parts A$,$ E$,$ F and G$.$ Please

discuss in one paragraph why there are differences in the values. Which valuation method do you believe

most clearly represents the true value of Bailey Clothiers' stock?