Gizzly plc is a publicly traded company in stable growth, expecting to grow at 4% a year in perpetuity. The return on equity for the company 10% and its cost of equity is 8%. a. Estimate the intrinsic P/E ratio for the company.

b. If you believe a company cannot earn more than its cost of equity in the long run, by how much (in percentage terms) is the equity in Gizzly over or under valued? (3 marks)

Formula Sheet CAPM: Ri = RF + Bi (ERP) Levered/Unlevered beta: BL = Bu * (1+ (1 - 1)* Debt/Equity) 1+9H 1- Div n+1 Two-stage DDM Equity. - Div. (1+gw) 1+keH keH - 9H (kon - 9n)*(1+kt) Two-stage RIM + Equity, =BV, + RIG RI = (1+key)" (kon -9N)*(1+keH)" Intrinsic P/E ratio PO E Payout ratio *(1+g) (1-g/RoE)*(1+g) k-g k-g Intrinsic P/B ratio P BV RoE * Payout ratio ke-g RoE-9 ke-g Intrinsic P/S ratio TL TA PO S. NPM* Payout ratio * (1+g)_ RoE-9. ke- ke-9 1- TA EV Intrinsic EV/EBITDA ratio =[ Dep *T Capex AOWC)(1+g) 1-T + EBITDA EBITDA EBITDA K-9 EBITDA Intrinsic EV/EBIT ratio V. EBIT, (1-T)*(1-Reinvestment Rate) * (1+g) ko-g GEBIT = Reinvestment rate * Return on Capital Reinvestment rate = Reinvestment / EBIT(1-T) Reinvestment = Capex - Dep + AOWC FCFF = EBIT (1-T) - Reinvestment Return on Capital = EBIT(1-T)/(Debt + Equity - Cash) gni = Equity reinvestment rate * Return on Equity Equity reinvestment rate = Reinvestment in equity / Non-cash net income Non-cash net income = Net income Cash*(Interest rate on cash)*(1 Tax rate) Reinvestment in equity = Capex Dep + AOWC - ADebt Return on equity = Net income / Book equity Return on non-cash equity = Non-cash net income / (Book equity Cash) FCFE = Net Income Reinvestment in equity