Tom Gilbert, founder and chair of the board of Gilbert Enterprises, could not believe his

eyes as he read the quote about his firm in The Globe and Mail. The stock had closed at

$$35\mathrm{.}25,$ down $$3\mathrm{.}75$ for the week. He called his vice$$president of finance, Jane Arnold, and

they agreed to meet on Saturday morning at $9$ a$.$m$.$ for breakfast.

When Jane arrived, they reviewed the stock$$s performance for the past few months.

Although the stock opened the year $(20$XX$)$ at $$28\mathrm{.}50$ per share, it had reached a high of

$$50$ in March, but had steadily slid in value to its current level of $$35\mathrm{.}25$ in mid$$May$.$ Tom

and Jane both thought the stock was undervalued in the marketplace and were seriously

considering an announcement that the firm was going to repurchase up to one million of its

own shares in the open market beginning on June $1,20$XX$.$ They thought this 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 firm of Baker, Green

and Roth. Roth had aided the firm in initially selling its stock to the public $($going public$)$

five 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 to them in the next few days with his recommendation on a stock

repurchase.

Gilbert Enterprises was the third$$largest firm in the auto parts replacement industry,

specializing in brake parts, power transmissions, batteries, cables, and other products

related to used automobiles. Although most of the 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 eight years in

$20$XX$,$ up from a mere $6\mathrm{.}8$ years from $10$ years previously. Why? New vehicle price increases

had far surpassed the rise in consumer income. People are forced to keep their old cars

longer whether they want to or not. Furthermore, environmental legislation mandated more

emission inspections and maintenance programs. Consumers were being forced to spend

more money to update older automobiles to meet these standards.

Gilbert Enterprises had the most advanced just$$in$$time $($JIT$)$ inventory management system

in the industry. For that reason, Albert Roth believed the firm 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. Current dividends were $1\mathrm{.}20$ per share,

and he decided to use a discount or required rate of return of $10$ percent.He discussed this approach with his partners, and although they generally agreed, they

suggested that he also consider a more traditional approach of comparing the firm's $\frac{P}{E}$

ratio to other firms in the industry. $\frac{P}{E}$ data along with other information are shown

in Table $1$ for

What recommendation would you suggest that Albert Roth make? Do you suggest the firm is

under$$ or overvalued?