Required1. Using the approach for the valuation of a supernormal growth firm. compute the value of Gilbert Enterprises' stock. Round all values in the computation to two places to the right of the decimal point. Does the firm appear to be under or overvalued?2. Examine the data in Figure 1 and indicate whether the firm's P/E ratio appears to be appropriate in light of other firms in the industry.3. Based on the answers to questions 1 and 2, what recommendation would you suggest that Albert Roth make?Please share the way to calculate in professional calculator as AB || +
Gilbert Enterprises Tom Gilbert, thunder and chairman of the board of Gilbert Enterprises, could not believe his eyes as he read the quote about his rm in The Wall Street Journal. The stock had closed at 35 1/4, down 3 3/4 points for the week, He called his vice president of nance, Jane Arnold, and they agreed to meet on Saturday morning at 9:00 am. for breakfast. When .lanc arrived, they reviewed the stocks performance for the last few months. Although the stock opened the year (2016) at 28 [/2 per share, it had reached a high of 50 in March, but had steadily slid in value to its current level of 35 1/4 in mid-May. Tom and Jane both thought the stock was undervalued in the marketplace and were seriously considering an announcement that the rm was going to repurchase up to one million of its own shares in the open market beginning on June 1"l of 2016. They thought that would send a message to investors that the market had placed the stock at an unrealistically low level. Before taking any action, they decided to consult with their investment banking representative. Albert Roth, senior vice president at the investment banking rm of Baker, Green and Roth. Roth had aided the rm in initially selling its stock to the public (going public) ve years ago and was quite familiar with its operations, Although he was surprised to receive their call during an early Saturday morning round of golf at the country club, he promised to get back with them in the next few days with his recommendations on a stock repurchase, The Firm's Business Gilbert Enterprises was the third largest rm in the auto parts replacement industry, specializing in brake parts, power transmissions. batteries, cables and other products related to used automobiles. Although most auto industry advertising relates to flashy new cars, Albert Roth knew that the auto parts replacement industry was becoming increasingly important. His research indicated that the average age of an automobile life had reached 11,6 years in 2016, up from a mere 6.8 years in the mid1980's. Why? New vehicle price increases had far surpassed the rise in consumer income. People are now forced to keep their old cars longer whether they want to or not. Furthermore, legislation has mandated more emission inspections and maintenance programs. Consumers are now being forced to spend more money to update older automobiles to meet these standards. Valuation Gilbert Enterprises had the most advanced just-in-time (JIT) inventory management system in the industry. For that reason, Albert Roth believed the rm would enjoy supernormal growth beyond industry standards for the next three years. His best estimate was that a 15 percent growth rate during that time period was entirely reasonable. After that time span, a more normal growth rate of 6 percent was expected. Because of the supernormal growth potential, he decided to consult Appendix 10A of the Block, Hirt, and Danielson textbook to compute the value. Current dividends (D.,) were 1.20 per share and he decided to use a discount or required rate of return (K..) of II] percent. He discussed this approach with his partners and while they generally agreed, they suggested that he also consider a more traditional approach ot'comparing the rm's price-earnings ratio to other rms in the industry. Price-earnings data along with other information are shown in Figure l for Gilbert Enterprises and three other firms in the industry. Figure 1 Annual growth in EPS(1aslS years) Comparative Data for Auto Parts Replacement Firms Gifberr E Irlclyn'frcx [2% Retum on stockholders' equity. 18.0% Relum on total assc .. 12.1% Debt to total us 33% Market value... $35.25 Book value ............ $16.40 Replacement value $43.50 Dividend yield 3.40% P/E ratio ...... 16.8 Reliance Standard A Iliad Parts A ma MUl'UI'S 8% 7% 9% 25.3% [4.0% 15.3% 8.1% [0.5% 9.8% 68% 25" o 36% $70.50 $24.25 $46.75 $50.25 $19.50 $50.75 $63.75 $26.00 $37.50 2.18% 5.26% 3.12% 24. I 14.2 I H. l
