Question 3

Tackle-West has been assigned to analyse Fantastic Ltd. Tackle-West makes some assumptions: Earnings and dividends will grow at a constant rate of 13%. The required rate of ROE is 14%, the growth of the industry is 13%, and the industry P/E ratio is 26. Exhibit 1 presents Fantastics Financial Statements for 2019 and 2020 (All figures are in millions, except per share data)

Exhibit 1
Income Statement	2019	2020
Revenue	474	598
Depreciation	20	23
Other operating costs	368	460
Income before taxes	86	115
Taxes	26	35
Net Income	60	80
Dividends	18	24
Earnings per share	$0,71	$0,95
Dividends per share	$0,21	$0,29
Common shares outstanding	84	84
Balance Sheet	2019	2020
Current assets	201	326
Net property, plant, and Equipment	474	489
Total assets	675	815
Current Liabilities	57	141
Long-term debt	0	0
Total Liabilities	57	141
Shareholder's Equity	618	674
Total Liability and Equity	675	815
Other information
Capital expenditures	34	38

1. Based on the above information, calculate justified trailing (e.g., 2019) and forward (e.g., 2020) P/Es for this Fantastic Ltd. (7 marks)
2. Identify within the context of the constant dividend growth model, how each of the following fundamental factors [in isolation] would affect the P/E (8 marks):

1. The risk (the variance of the market) increases substantially.
2. The risk (the standard deviation of the Fantastics share price) increases substantially.
3. The expected returns of the market increase.
4. The beta for Fantastic decreases.