Mini-Case: Bok Sports Ten years ago, in Johannesburg, Joost van Hees founded a s
ID: 2802965 • Letter: M
Question
Mini-Case: Bok Sports Ten years ago, in Johannesburg, Joost van Hees founded a small mail-order company selling high quality sports equipment. Since those early days Bok Sports has grown steadily and been consistently profitable. The company has issued 2 million shares, all of which are owned by Joost van Hees and his five children. For some months Joost has been wondering whether the time has come to take the company public. This would allow him to cash in on part of his investment and would make it easier for the firm to raise capital should it wish to expand in the future. But how much are the shares worth? Joost's first instinct is to look at the firm's balance sheet, which shows that the book value of the equity is R263.4 million, or R131.7 per share. A share price of R131.7 would put the stock on a P/E ratio of 6.6. That is quite a bit lower than the 13.1 P/E ratio of Bok's larger rival, Wenner Corporation. Joost suspects that book value is not necessarily a good guide to a share's market value. He thinks of his daughter Jenny, who works in an investment bank. She would undoubtedly know what the shares are worth Before speaking to her, Joost jots down some basic data on the company's profitability. After recovering from its early losses, the company has earned a return that is higher than its estimated 10% cost of capital. Joost is fairly confident that the company could continue to grow fairly steadily for the next six to eight years. In fact he feels that the company's growth has been somewhat held back in the last few years by the demands from two of the children for the company to make large dividend ayments. Perhaps, if the company went public, it could hold back on dividends and plow more money back into the business. There are some clouds on the horizon. Competition is increasing and only that morning Wenner announced plans to form a mail-order division. Joost is worried that beyond the next six or so years it might become difficult to find worthwhile investment opportunities. Joost realizes that Jenny will more about the prospects for the business before she can put a final figure on s value, but he hopes that the information is sufficient for her to give a preliminary indication of need to know much the value of the shares. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Earnings per share, R Dividend, R Book value per share ROE, % 21.0 7.0 23 81 11.0 13.0 152 164 20.0 20.3 0.0 0.0 0.0 20 2.0 3.0 30 6.0 6.0 8.0 R 980 77.0 70.0 76.1 85.1 95.1 1073 117.7 131.7 144.0 7.1 30 116 14.5 15.3 16.0 15.3 17.0 15.4 27.10 QUESTIONS 1. Help Jenny to forecast dividend payments for Bok and to estimate the value of the stock. You do not need to provide a single figure. For example, you may wish to calculate two figures, one on the assumption that the opportunity for further profitable investment disappears after six years and another assuming it disappears after eight years 2. How much of your estimate of the value of Bok's stock comes from the present value of growth opportunities?Explanation / Answer
Solution:
Part - 1
To forecast dividend payments for Reeby Sports and to estimate the value of the stock.
Part 2
In case of when oppurtunity for profitable investment is reduced in year six we have calculated present value of growth oppurtunities to be $ 11.99 per share
number of shares outstanding =2 million
present value of growth oppurtunities = $11.99*2 = $ 23.99
In case of when oppurtunity for profitable investment is reduced in year 8 we have calculated present value of growth oppurtunities to be $ 15.89 per share
number of shares outstanding =2 million
Present value of growth oppurtunities = $15.89*2
= $ 31.79
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E Earnings per share, $ -2.1 -0.7 0.23 0.81 1.1 1.3 1.52 1.64 2 2.03 Growth rate 35.80% 18.18% 16.92% 7.89% 21.95% 1.50% Dividend, $ 0 0 0 0.2 0.2 0.3 0.3 0.6 0.6 0.8 Book value per share, $ 9.8 7.7 7 7.61 8.51 9.51 10.73 11.77 13.17 14.4 ROE, % -27.1 -7.1 3 11.6 14.5 15.3 16 15.3 17 15.4 Retention ratio b 39.41% Dividend per share/Earnings per share Growth rate 9.33% ROE*(1-b) Six year Model Year Earnings present value interest factor@ wacc = 10% 2011 $ 2.03 1 2.03 2012 $ 2.22 0.909090909 2.017655 2013 $ 2.43 0.826446281 2.005384 2014 $ 2.65 0.751314801 1.993188 2015 $ 2.90 0.683013455 1.981067 2016 $ 3.17 0.620921323 1.969019 Prsent Value of growth oppurtunities $ 11.99631 Terminal year expected earnings t 3.171124733 Terminal value of all expected earnings T 31.71124733 t/WACC Present value of terminal value 19.69018965 PVIF for sixth year *T Expected value of stock price $ 31.69 Present Value of growth oppurtunities + present Value of terminal value