CASE STUDY TITLE:

ENCORE INTERNATIONAL

A. SYNOPSIS
In the world of trendsetting fashion, instinct and marketing savvy are
prerequisites to success. Jordan Ellis had both. During 2012, his
international casual-wear company, Encore, rocketed to $300 million in
sales after 10 years in business. His fashion line covered the young
woman from head to toe with hats, sweaters, dresses, blouses, skirts,
pants, sweatshirts, socks, and shoes. In Manhattan, there was an
Encore shop every five or six blocks, each featuring a different color.
Some shops showed the entire line in mauve, and others featured it in
canary yellow. And so on contrary to the conservative securities
analysts, Jordan Ellis felt that the company could maintain a constant
annual growth rate in dividends per share of 6% in the future, or
possibly 8% for the next 2 years and 6% thereafter.
B. CASE VIEWPOINT
MBA STUDENT
C. STATEMENT OF THE PROBLEM
Which valuation method is most clearly representing the true value of the
Encore stocks?
D. STATEMENT OF THE OBJECTIVES
1. Establishing various methods of valuation.
2. Risk and return are integrated into the case with the addition of the
security market line and the capital asset pricing model
E. STATEMENT OF THE AREAS OF CONSIDERATION
Establishing various methods of valuation such as Price/Earnings
multiple, book value, no growth, constant growth and variable
growth models
F. STATEMENT OF ALTERNATIVE COURSES OF ACTION
Establishing various methods of valuation such as Price/Earnings
multiple, book value, no growth, constant growth and variable
growth models by computing and evaluating each methods of
valuation.
1. Book value per share
2. Price /Earnings ratio

= $60,000,000/2,500,000= $24
=$40/$6.25= 6.4

3. Required return risk premium using capital asset

= 6 %+( 1.10 x (14%-6%)=6%
+8.8%=14.8%
4.

Required return risk premium using capital pricing asset model

= 6% + (1.25 x (14%-6%)= 6%
+10%= 16 %
5. Zero Growth:
$4.00/.16 =$25
6. Constant growth:
($4.00x1.06)/9./.16-.16)=
$4.24/.10=$42.40
7. Value of cash dividends and present value of annual dividends
Year t
d
FVIF D
PVIF Present value of
dividend
2004 1 $4.00
1.080 $4.32 .862
$3.72
2005 2 $4.00
1.166 4.66 .743
3.46
Total
7.18
8. Present value of price of stocks at end of initial growth period:
D2003= $4.66 x (1+.06)= $4.94
P2005= $4.94/(.16-.06)= $49.40
9. Present Value of stock at end of year 2 (2005)= $49.40 x (.743)=
$36.70
10.
Sum of present value of dividends during initial growth
period and present value of stock at end of growth period:
P2003= $7.18 +$36.40= $43.88
Summary:
Valuation Method
Per Share
Market Value $40.00
Book Value
24.00
Zero Growth
25.00
Constant Growth
42.40
variable Growth
43.88
G. CONCLUSION
Base on the computation, the book value has no relevance to the true
value of the firm. Of the remaining methods, the most conservative
estimate of value is given by the zero growth model. Wary the analyst
should advise paying no more than $25 per share.
H. RECOMMENDATION

The inverse of the P/E is the measurement of required return to the

investor, therefore, I would like to recommend that the inverse of P/E
(15.6%) and 16% for the CAPM is required return.