Gizzly plc is a publicly traded company in stable growth, expecting to grow at 4% a year in perpetuity. The return on equity for the company 10% and its cost of equity is 8%.

a. Estimate the 'intrinsic' P/E ratio for the company.

b. If you believe a company cannot earn more than its cost of equity in the long run, by how much (in percentage terms) is the equity in Gizzly over or under valued?

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CAPM: Ri= RF + Bi (ERP) Levered/Unlevered beta: B₁ =B₁ *(1 + (1 – t) * Debt / Equity) - Two-stage DDM Two-stage RIM Intrinsic P/E ratio Intrinsic P/B ratio Intrinsic P/S ratio Equity = Div(1+gH) - Equity = BV₁ + 0 P E₁ P₁ BV Formula Sheet Intrinsic EV/EBITDA ratio Intrinsic EV/EBIT ratio 1- V ЕВІТ, RoE * Payout ratio ke-g EVO EBITDA e,H Ke,H - 9H - 1+gH 1+ke. Rin+1 RI₁ + Σ(1+ Kon)* =1(1+K₂H) (K₂N-9N)*(1+K₂H)" e,H Payout ratio * (1+g) _ (1-g/RoE)*(1+g) ke-g ke-g Ро NPM * Payout ratio * (1+g) _ RoE-g* So ke- g ke-g n T) + + gEBIT Reinvestment rate * Return on Capital Reinvestment rate = Reinvestment / EBIT(1-T) Reinvestment = Capex - Dep + AOWC FCFF = EBIT (1-T) - Reinvestment Div n+1 (KON-9N)*(1+K₂H" RoE-g ke-g k₁-g e,H TL ΤΑ 1-TA). T ΤΑ Dep* T EBITDA EBITDA Capex AOWC (1+g) EBITDA ko-g (1-T)*(1-Reinvestment Rate) *(1+g) CAPM: Ri= RF + Bi (ERP) Levered/Unlevered beta: B₁ =B₁ *(1 + (1 – t) * Debt / Equity) - Two-stage DDM Two-stage RIM Intrinsic P/E ratio Intrinsic P/B ratio Intrinsic P/S ratio Equity = Div(1+gH) - Equity = BV₁ + 0 P E₁ P₁ BV Formula Sheet Intrinsic EV/EBITDA ratio Intrinsic EV/EBIT ratio 1- V ЕВІТ, RoE * Payout ratio ke-g EVO EBITDA e,H Ke,H - 9H - 1+gH 1+ke. Rin+1 RI₁ + Σ(1+ Kon)* =1(1+K₂H) (K₂N-9N)*(1+K₂H)" e,H Payout ratio * (1+g) _ (1-g/RoE)*(1+g) ke-g ke-g Ро NPM * Payout ratio * (1+g) _ RoE-g* So ke- g ke-g n T) + + gEBIT Reinvestment rate * Return on Capital Reinvestment rate = Reinvestment / EBIT(1-T) Reinvestment = Capex - Dep + AOWC FCFF = EBIT (1-T) - Reinvestment Div n+1 (KON-9N)*(1+K₂H" RoE-g ke-g k₁-g e,H TL ΤΑ 1-TA). T ΤΑ Dep* T EBITDA EBITDA Capex AOWC (1+g) EBITDA ko-g (1-T)*(1-Reinvestment Rate) *(1+g)

Answer rating: 100% (QA)

Answer a Intrinsic PE ratio 1 gROE1g Keg g Growth rate 4 ROE 10 Ke Cost of equity 8 ... View the full answer