Suppose that in January 2006 Kenneth Cole Productions had EPS of $2.57 and has 1

Question

Suppose that in January 2006 Kenneth Cole Productions had EPS of $2.57 and has 1 million shares outstanding. The following table represents data on a set of publicly traded comparable firms. D:V (Leverage) Growth Rate 15.01 15% Average Highest (90 above average) Lowest (% below average) 0.5 + 31% +10% + 2090 22% -10% -15% Using the information on average P/E multiples from the table above, estimate KCP's share price and the price range based on the highest and lowest P/E multiple:s If KCP's leverage is 0.4 do you expect your share price estimate in (a) to be too high or too low? Explain If KCP's expected earnings growth rate is 10% do you expect your share price estimate in (a) to be too high or too low? Explain a. b. c.

Explanation / Answer

a.) Apply this formula to get the result as below:   P/E Ratio = Price Per Share / Earnings Per Share (Eps)

b.) As the question says D:V leverage to decrease from the current level it can be expected that this will reduce the organization's burden for debt and interest payment will decrease as given this should in general will either raise to the level of .44 or .36 from the current level as 10% incease or the decrease as suggested by the question. If all circumstances remain the same as today this should increase the share price from the current level but if adverse condition happen same may change but if same continues this should increase the share price as debt burden is reduced and so is the interest payment.This rise will be neither too high nor too low.

c.) If growth rate is 10% which is substaintily below the current level it will definetly decrease the share price unless other stocks in the similar industry in which firm operates is also facing the same problems.But if same scenario as suggested doesnot happen and other's perfom normally this will lead to too low price but, as discussed others don't perfom well there will be less impact on the suggested price.

d.) PE = 15.26 + 5*g-2*D/V

Result will be as follows:

Price per share will be generated by the Formula in the last Earnings per share will be held constant P/E Ratio = Price Per Share / Earnings Per Share (Eps)                                                           38.58 2.57                                                                        15.01                                                           50.53 2.57                                                                        19.66                                                           30.09 2.57                                                                        11.71

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