Question

Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values provided are from year-end 2019. Also assume that the firm’s equity beta is 1.20, the risk-free rate is 2.65 percent, and the market risk premium is 7 percent.

Dividends per share	$	2.26
Return on equity		9.50	%
Book value per share	$	18.70

	Earnings			Cash Flow			Sales
2019 value per share	$	5.00		$	6.30		$	25.65
Average price multiple		13.10			9.53			2.47
Forecasted growth rate		13.59	%		11.30	%		7.23	%

a. What are the sustainable growth rate and required return for Beagle Beauties? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

b. Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

a. sustainable growth rate = [Return on equity*(1-payout ratio)]/1 - [Return on equity*(1-payout ratio)]

payout ratio = dividend per share/earnings per share = $2.26/$5 = 0.452 or 45.2%

sustainable growth rate = [0.095*(1-0.452)]/1 - [0.095*(1-0.452)]

= (0.095*0.548)/[1 - (0.095*0.548)]

= 0.05206/(1 - 0.05206) = 0.05206/0.94794 = 0.0549 or 5.49%

required return = risk-free rate + beta*market risk premium = 2.65% + 1.20*7% = 2.65% + 8.4% = 11.05%

b. current share price = current dividend per share*(1+sustainable growth rate)/(required return - sustainable growth rate)

current share price = $2.26*(1+0.0549)/(0.1105 - 0.0549) = $2.26*1.0549/0.0556 = $2.384074/0.0556 = $42.88

the current share price of Beagle Beauties stock according to the constant dividend growth model is $42.88.