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 firms 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?

Tom Galbert, founder and chairman of the board of Gilbert Enterprises, could not believe his eycs as he read the quoes about his firm in The Wall sirver hourna? The stock had closed at 351/4, down 3 3/4 points for the weck. He called his vice president of finance. Jahe Arnold, and they agreed to meet on Saturfay nocning an 9.00a.m for breakfist. Whes Jane atrived, they reviewed the stock's performance for the last few months. Although the stock epened the year (2016) at 28% per share, it had reached a high of 50 in March, but had sheadly slid in value to its current tevel of 351/4 in mid-May. Tom and lane both thought the abek was undervalued in the marketplase and were seriously coxosidering an announcement that the finm was going to repurchase up to one million of its own shares in the open market beginning on June. 1 of 2016 . They thought that woald send a message to imeston that the market had placed the stock at an untealintically kow level. Before taking ary action, they decided to consult with ther investment banking representative, Nbert Roth, senicer vice peesident at the investment banking firm of Baker, Gecen and Reth. Roth had aided the firm in initially selling its stock. to the public (goung poblic) five years ago and was quite familiae with its operations. Although he was sarprised to teceive their call during an early. Saturday morning round of golf at the coustry club, be preenised to get back with them in the next few days with his recoenencndakions on a stock, repurchane. The Firm's Business Gilert Enterprises was the third laypest frm in the auto parts icplacement industry. specialining in brake parts, power transmisaions, butteries, cables and other prodicts frlated to boed aticenobiln. Altrough most wato industry advertaing relates fo flashy new cars, Allon Roth knew that the auto parts neplacement industry was beconing incteasiegly important. His rescatel indicatcd that the averape age of an auknobile Fife had reached II.6 yoars in 2016, up from a mete 6.8 years in the mid-19s0's. Why? New vehicle price increates had far surpassed the rise in consumer inconse. People are now foeced so keep their elaf cans benget wherther they want to or not. Furthermore, kgialation has mandated more cmission ingpections and maintenance programs. Consumers are now being forced to spend mote money to update ofder automobiles to meet these standants. Valuation Gilber Enterprises had the most advanced just-in-time (JT) inventory managcment system in the indastry. For that reason, Albert Roth believed the firm would capjoy supcriormal growth beyond industry standards for the next three years. His best estimate was that a 15 percent prowth eate durieg that time period was entirely reasonable, Afler that time span, a moee normal growth fale of 6 percent was expecied. Because of the supernormal grosth potemial, be decided to consutr Appendix 10A of the Block. Hin, and Dantelson tecthook to use a disceest es requirsd rate of retarn (Ki) of 10 percent. He discuised this approach with his partners and while they pencrally agroed, they vapestod that he alo consider a more traditional approokh of comparing the firm's price-varnings ratio to other firms in the industry. Price-earnings data aloeg with other information are shown in Figure 1 for Cilbert Enterprises and three echer firms in the industry. Figure 1 Comparatve Dafa for Auto Parts Replacement Firms decimal point. Doestle fin apper to be under or onevalued? 2. Evamise the data in Fipore 1 and insicate whether the firm's PE ratio appeaen to be appesgnate in light of esher firms in the indiritry. 3. Based en the aven to qoentions 1 and 2. what recommendrio would wou wogest that Mbert Roth makef