CASES PART 3 – EQUITY MARKET

Case 1. On vous communique les informations suivantes sur trois entreprises à la fin de l’année
N:
Company Payout ratio (N) Forecast EPS Growth rate P/E (N) 
A 25% 30% 12 1,3
B 90% 3% 14 0,9
C 40% 10% 24 0,5

Questions.
1. Which of these three companies is the most mature? Justify.
2. Why does company A's very high forecast EPS growth rate not preclude the
assertion that investors perceive a strong risk in this company?
3. Which of these companies is the least risky? Justify.

1) L’Entreprise B est la plus mature (la + stable) car le taux de distribution est très élevé, donc elle reverse
beaucoup de bénéfices.
En effet, le taux de croissance de l’EPS est le plus faible des 3 entreprises et il n’est pas très élevé.
De plus, b < 1 donc l’action est défensive, les variations des rendements de l’action sont atténuées lorsque
le marché varie.
Enfin, le PER est dans la moyenne des 3.

1) Company B is the most mature (the most stable) because its payout ratio is very high, so it pays out a
lot of profits.
In fact, the EPS growth rate is the lowest of the 3 companies and is not very high.
In addition, b < 1 means that the share is defensive, and variations in share performance are attenuated
when the market fluctuates.
Finally, the P/E is within the average of the 3.

2) Le taux de croissance de l’EPS est élevé avec un PER faible, le plus faible, ce qui signifie que le marché
ne croit pas tellement au taux de croissance prévisionnelle de l’EPS parce qu’il ne répercute pas sur le PER
donc sur le stock price (valeur du marché).
De plus, le b de l’entreprise A est supérieure à 1 (b > 1) donc l’action est agressive. Il y a une amplification
des rendements de l’action lorsque le marché varie.
Le taux de distribution est faible (25%) ce qui peut signifier que l’E se préserve.

2) The EPS growth rate is high with a low P/E, the lowest, which means that the market does not have
much faith in the forecast EPS growth rate because it has no impact on the P/E and therefore on the stock
price (market value).
In addition, company A's b is greater than 1 (b > 1), so the share is aggressive. Share returns are amplified
when the market fluctuates.
The payout ratio is low (25%), which may mean that E is protecting itself.

3) L’entreprise C est la moins risquée car :

b < 1 donc action défensive→ c’est le b le plus faible
Le PER est élevé conjugué à un taux de croissance de l’EPS élevé aussi
Et le payout ratio est modéré ce qui indique un équilibre.

3) Company C is the least risky because :

b < 1 so share défensive is the lowest b
The P/E is high, combined with a high EPS growth rate.
And the payout ratio is moderate, indicating equilibrium.
 Case 2. You have the following information about a listed company

Current stock price 124€ Next DPS 6.5

Number of stocks 1 500 000 Risk-free rate 3.8%
Bêta of the stock 1.4 Net income 7 300 000
Market risk premium 8.7% Infinite growth rate 2%

1. Calculate the market capitalization.

Market cap = stock price x nb of stocks = 124 x 1 500 000 = 186 000 000 €

2. Calculate the P/E.

P/E = stock price/EPS = market cap/net income
EPS = net income/nb of stocks = 7 300 000/1 500 000 = 4,87 €
P/E = 124/4,67 = 25,5
Or P/E = 186 000 000/7 300 000 = 25,5

3. Interpret the Bêta.

b is higher than 1 → the stock is aggressive (1,4).
The changes of the stock returns are amplified when the market involves.

4. Calculate the cost of equity by the CAPM.

CAPM: k = rf + bi (Rm-rf)

Market risk premium

Stock risk premium

K = 3,8 % + 1,4 + 8,7 %

K = 15,98 %
Shareholders return requirement is 16 %

5. Calculate the value of the stock thanks to the Gordon & Shapiro method.
G&S: V0 = D1/k-g
V0 = 6,5/(15,98% - 2%) = 46,49 €
The stock price seems to be overestimated while the stock price on the market is 124 € whereas the value
of the stock according to G&S method gives us 46,49 €.

6. An investor bought the stock 121€ at the beginning of the year. Calculate his rate of return.

Rate of return of the stock = gain on the stock price + dividend rate
= (124/121 – 1) + 6,5/124

Case 3.
Company Market Net Equity Sales EBITDA EBIT Net
Cap Debt (book Income
value)
A 100 20 75 110 60 40 30
B 80 10 60 90 30 25 15
C 120 5 105 130 70 50 35

Questions
1. Value C by listed comparable method (P/B ratio, xSales, xEBITDA, xEBIT and PER).
 Your sample will be composed of companies A and B.
2. Interpret the results.

Company P/B xSales xEBITDA xEBIT P/E

A 1,33 1,09 2 3 3,33
B 1,33 1 3 3,6 5,33
Sector multiple 1,33 1,045 2,5 3,3 4,33
Agregat C 105 130 70 50 35
135,85 175 165
EV of C
(net debt C)
(5) (5) (5)
Economic equity 1,33x105 =
130,85 170 160 151,55
value C 139,65

Avec:
• P/B = market cap/book value
• xSales = EV/sales
• xEBITDA = EV/EBITDA
• xEBIT = EV/EBIT
• P/E = market cap/net income
• EV = MC + ND

Les ratios ayant des cases rouges donnent directement la market cap → pas besoin de calculer l’EV.

ATTENTION → LA DETTTE NETTE PEUT ETRE POSITIVE → ON L’AJOUTERA ALORS A « EV OF C ».

The stock price seems to be underestimated according to G&S method car les résultats obtenus sont
supérieurs aux initials.

C semble être sous-estimée car toutes les méthodes donnent un résultat supérieur à celui de

On recommande d’acheter l’action C.

C’est avec le multiple de EBITDA qu’on a le plus haut résultat → cela signifie que l’E C à un taux de marge
EBITDA plus élevé que ses pairs (peers).

The stock price seems to be underestimated according to G&S method because the results
obtained are higher than the initial ones.

C seems to be underestimated as all methods give a result higher than the initial one.

We recommend buying C.
The EBITDA multiple gives the highest result which means that C has a higher EBITDA margin
than its peers.