Introduction:

Origin of the report:

This report is prepared for Prof. Dr M. Sadikul Islam, Course teacher of Analysis of
Financial Investment Course # F-307, Faculty of Business Studies at University of Dhaka as a
partial requirement of the course. Our course instructor has assigned to the students of the
department of Finance, BBA 19th batch, to make report on HOP-In Food INC This report is
prepared during the 2nd semester of 3rd Year and would be submitted in the same semester. The
standard procedure for the long, formal report is followed here as part of the instruction of the
course instructor.

Objective of this report:

The primary objective of the report is to fulfill the partial requirement of the course.
The secondary objectives of this report are to:
To gather knowledge about Investment analysis.
To gather an overall idea about investment analysis
To know the application of valuation methods
To gain firsthand knowledge on the topic that we have been assigned.

Methodology:
To prepare this report we mainly depended on the secondary data.

Primary Data Collection:

The primary data has been collected from:

Internet
Books about Investment Analysis
Class Lectures

Scope of the study :

Everything has some advantage which helps that work to be completed thoroughly. We get some
scope which helps us to make a standard report. Major of them are-

Enough Time: We had got enough time to prepare a report so that we could gather
enough information with less tension.

1
 Easy Topic: The topic of us was much easier because we have learnt about Capital
Budgeting .So we didnt face any problem related to our topic.

Easy access to information: we had an easy access to information. We gathered enough

information from different websites.

Limitation of the study :

Every study has some limitations. We faced some usual restrictions during the course of our
preparation for the report. The major limitations are as follows:

Lack of knowledge: We dont have enough knowledge about Valuation because we just
learnt the topic and didnt get any opportunity of practical Implementation.
Lack of acquaintance: As we dont have any direct references, we found it difficult to
find elaborate information. So the report has some limited information.

We hope that our respected course teacher will overlook the limitations and overview the report
with a positive view.

2
 Chapter 01
The Case on Hop-in Food Inc.

1.1. The problem statement:

The problem of the case requires to calculate the intrinsic value of the company. There are two
parties in this case i.e. The issue company and the investment bank, who are exposed to risk.
Between them the investment bank is exposed to greater degree of risk and the issuer is exposed
to lower degree of risk as the investment bank is hedging its risk. The assessment of each partys
risk requires to calculate the intrinsic value of the company.

If the shares of the issuer turn out be overvalued, the investment bank runs the risk of
being unable to sell all of those shares and obliged to pay the issuer the underwritten
price.
If the shares of the issuer turn out be overvalued, the issuer is foregoing the opportunity
cost of not selling their shares on a Best effort basis. Because, under this situation,
issuer could win higher sales proceeds from shares and avoid underwriting commission.

1.02 Alternative courses of actions:

To value the common stocks of the company, we can use

Discounted cash flow technique.

Relative valuation technique.

We have applied two DCF techniques and one Relative valuation technique:

Alternatives: (1) Free Cash Flow To Equity model.

(2) Dividend Discounting model.

(3) Price to Earning Valuation model.

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 1.3 Pros and cons of each models:
Dividend Discount Models (DDM)

There is no perfect way to value a stock, and the dividend discount model is just one of many
ways to value any given stock.

Advantages:

What makes the dividend discount model great:

1. Conservatism The dividend discount model values a company only on what it pays
out to investors. It does not directly take into consideration earnings of a company, the
cash the company holds, or anything other than the dividend. It assumes that the investor
will generate a return from dividends, not appreciation or some pie-in-the-sky buyout at
a 200% premium to the current trading price.

2. Simplicity The dividend discount model is one of the easiest ways to value a security.
It requires only three inputs, which almost any investor can reasonably determine or
forecast. Because of its conservatism, investors who value companies with a dividend
discount model have more room for error in the variables they forecast than do investors
who use alternative, more finicky projections.

Disadvantages:

These two advantages lead directly into the models disadvantages:

1. Selectivity The dividend discount model is limited in that it can be properly used only
with companies that pay a regular dividend, and which are expected to increase their
dividend at a constant rate in the future. This severely limits the model to very stable
companies like Coca-Cola (KO) or McDonalds (MCD), which are both known for a
long history of fairly regular dividend increases each year.

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 2. Sensitivity As with all valuation methods, the dividend discount model is only as good
as the numbers going into it. Garbage in, garbage out the model works only as long as
the key assumptions in the model prove to be mostly accurate.

As always, this model should be used with a margin of safety in mind. A margin of safety
protects investors from faulty assumptions in the model, and about a companys competitive
durability.

Discounted Cash Flow (DCF):

Advantages:

DCF is arguably the most sound method of valuation as it calculates the closest intrinsic value of
the company. It is a forward-looking approach which depends more on future expectations rather
than historical results.

It is influenced to a lesser extent by volatile external factors because it is an inward looking

process which relies more on the fundamental expectations of the business and explicit estimates
of the value drivers. Unlike relative valuation methodology, it is less affected by the accounting
practices and assumptions because it is focused on cash flow generation.

In addition to explicitly considering the drivers of value creation, the DCF allows analysts to
incorporate business strategy changes into the valuation. For example, a company might
implement a new cost cutting program designed to drive margins higher over time. If the investor
anticipates that the new program will be a success, she can factor the margin increases into future
cash flow estimates.

Clearly, there is a lot to like about this valuation tool. However, there are also reasons to be
cautious about it.

Disadvantages:

The accuracy of the valuation determined using the DCF method is highly dependent on the
quality of the assumptions regarding Free Cash Flows, Terminal Value, and Discount rate. The
value derived is highly sensitive to the inputs used, leading to wildly different valuations by
different analysts based on their subjective judgment of the future prospects of the company.

The Terminal Value (TV) often represents a large percentage of the total value derived through
DCF, causing the Enterprise Value to be largely dependent on TV assumptions rather than
operating assumptions for the business.

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DCF works best when there is a high degree of confidence about future cash flows. But things
can get tricky when its difficult to predict future cash flow trends. Owing to this, it is not
considered prudent to value early stage enterprises using this methodology.

P/E Ratio:

Advantages:

The advantages of using the P/E are:

1. It is easy to compute.

2. It is conventionally and widely used.

3. It takes forecasts into account.

4. Earnings is a measure of what is generated for shareholders

Disadvantages:

The disadvantages / problems with using the P/E are:

1. It does not take debt/financial structure into account.

2. Gearing up/share buy-backs increase earnings - but it may be a one-off effect and achieved at
the cost of increased risk.

3. Comparisons are undermined by different accounting policies across companies and countries
(depreciation, amortization, tax, etc).

4. Earnings are particularly prone to manipulation.

5. Targeting earnings may lead to decisions that disadvantage the business.

6. It cannot be used to value loss-making early-stage growth or cyclical businesses.

7. It does not take cash generation into account.

8. It does not take investment returns into account.

6
 ompanCIdEcyustriAl
9. Growth of earnings may take place at the expense of ROIC.

10. Growth of earnings may take place at the expense of net asset value

11. It presents difficulties in assessing quality of earnings.

Chapter 02
Three step valuation process: Top Down Approach
The three step valuation process is one of the most commonly used techniques in identifying the
intrinsic value of a share in order to assist in the investment decision of an individual.

The top down, 3 step valuation process involves the following:

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Advocates of this process believe that both the economy or market and the industry affect have a
significant impact on the total returns for individual stocks. It believes that only after a thorough
analysis of a global industry will someone be in a position to properly evaluate the securities
issued by individual firms within the better industries.

Chapter 3
Economic Analysis

The first step of three step valuation process is the economic analysis. The case provides very
little information regarding the US economy. Fluctuations in security markets are related to
changes in expectations for the aggregate economy. Aggregate stock prices reflect investors
expectations about corporate performance in terms of earnings, cash flows & the required rate of
return by investors. All of these expectations are heavily impacted by the economic outlook.

After analyzing the Hop- in Food Stores incorporated case, we found that there was a recession
in 1975,after recession there is a chance of increasing the equity value of the economy & we also
see that investors are optimistic about the aggregate economy. After recession, the investors
sentiment is expected to be fairly optimistic. Economic forecast suggests that the investors will
require lesser and lesser risk premium. As the interest rate of bond will be decrease, the price of
bond will be increase. On the other hand, coupon rate will be also decreased. So, declining
interest rates would draw investors fund away from Fixed Income Security market into the
Equity Security market, creating a favorable equity market climate. The risk free rate will
increase because of the higher expected GDP.

8
 Chapter 4
Industry Analysis

Framework used in the report for analysing the industry:

Demographic influence. Maceconomic influence.

governmental influence.

Threat of new intrans Threat of substitute

Economic
Group of complementary
Bargaining power industries
Bargaining power
of suppliers. of customers
Industry

Internal competitive forces.

Life cycle Analysis

Business cycle sensitivity

Tecnological imfluence. Social

influence.

1. What is the condition of potential Barrier to entry in the industry?

The industry has a low barrier to entry.
Low barrier to entry invites competitors.
The degree competition in the industry is fairly high.

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 The pricing power of the incumbents is relatively low.
2. How concentrated is the industry?
Both the grocery and gasoline markets are very much segmented.
The degree competition in the industry is fairly high.
The pricing power of the incumbents is potentially low.
Hop in food inc has relatively lower market share in the mature industry.
3. Does the industry facing over-capacity or under-capacity?
The industry is in an environment of under-capacity.
So the level of competition is very high.
Investing heavily for fixed cost an incumbent can capitalize the increasing demand.
4. Is the market share of the incumbents stable or unstable?
As the barrier to entry is high, the market share will be very unstable.
So the incumbents are expected to show fierce competitive behavior.
As the customers of this industry have low switching cost and high benefit from
substitutes, the competition in relatively high.
The pricing power of the incumbents is relatively low.
5. In which lifecycle stage the industry belongs to?

The figure shows the growth path of sales during each stage. The vertical scale in logs reflects
rates of growth whereas arithmetic horizontal scale has different widths representing different,
unequal time periods. To estimate industry sales, one must predict the length of time for each
stage. Besides being useful when estimating sales, this industry life cycle analysis also provides
insights into profit margins and earnings growth, although these profit measures may not parallel

10
the sales growth. The profit margin series typically peaks very early in the total cycle and then
leaves off and declines as competition is attracted by the early success of the industry.

In Hop in Food, the company was in the stage two which indicated that it was in the rapid
accelerating growth. In this stage the company was in high demand and had a high profit margin.
After this stage the company would go in maturity stage.

Summary:

Analysis Status Degree of competition

1. Barrier to Entry Low barrier to entry HIGH
2. Degree of concentration Low degree of concentration HIGH
3. Capacity of the industry Under capacity HIGH
4. Stability of market shares Volatile market share HIGH
5. Position in the Life cycle Growth stage HIGH

As the competition faced by the industry is very high the incumbents will:

Face fierce price competition.

Low pricing power.
High threat of substitute.

Nature of the Industry:

An insightful analysis when predicting industry sales and trends in profitability is to view the
industry over time and divide its development into stages similar to those that humans progress
through: birth, adolescence, adulthood, middle age and old age. The number of stages in industry
life cycle analysis can vary. A five stage model would include:
1. Pioneering Development
2. Rapid accelerating
3. Mature Growth
4. Stabilization and market maturity
5. Deceleration of growth and decline

PESTEL Analysis:
Originally known as PEST Analysis, this is a macro environmental framework used to
understand the impact of the external factors on the organization and is used as strategic
analytical technique. PEST stands for "Political, Economic, Social, and Technological factors.

Later Legal and Environmental factors were also added by some analysts and thus evolved the
term PESTLE Analysis.

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Political Factors:
Factors effecting the organizations in terms of government regulations and legal issues are
defined both formal and informal rules under which the firm must operate. Political stability is
very important for the economic growth of a company. From the analysis of historical economic
information we can predict the political environment. Because we know that there is a positive
relationship between economic efficiency and political stability. Regulatory factors like tax
policy, environmental regulation or other legal issues are important.

Economic Factors:
Economic factors act as a driving force for any industry. Stage of business cycle, current &
projected economic growth, e.g. GDP / GNP growth, inflation & interest rates, unemployment,
impact of globalization, levels of disposable income & income distribution, likely changes in the
economic environment

Social Factors:
Hop In Food creates greater customer awareness by ensuring better product which adds value to
the society than any other companies. Social factors also have great impact on an industry. Like-
population health, education & social mobility, population employment patterns, job market
freedom & attitudes to work, press attitudes, public, social attitudes & social taboos lifestyle
choices and attitudes to these, socio-cultural changes health consciousness.

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Technological Factors:
Technological factor is very important for the industry too. The rate of technology change is an
important factor here. Some technological factors are-impact of emerging technologies, impact
of internet, reduction in communication costs & increased remote working, research &
development (R&D) activity, impact of technology transfer, degree of automation, rate of
technological change. These factors have an impact on the industry where Hop- In Food by
which Hop In food can expand their business well.

Environmental Factors:
Factors refer to ecological and environmental aspects such as weather, climate, and climate
change. Food industry is affected because of bad weather, Govt. and other parties are now
cautious about environmental pollution and its solution.

Legal Factors:

Factors influence the companys operation, its costs, and the demand for its products.
Factors include: Consumer law, Anti-trust law, Food -safety laws, employment laws etc.

Porters Five Forces Model:

Forces Level
Threat of new entrants Low
1. Huge Capital requirement
2. High Product Differentiation
3. Govt. Barrier
Rivalry among existing firms High
1. High Number of Competitors 2. Low Growth

Threat of substitutes High

1. Numerous Airlines 2. Lower switching cost
Bargaining power of the buyer High
1. Low Degree of Product Differentiation
2. High Available option
3. 3. No Loyalty
Bargaining power of the supplier High
1. Number of Suppliers
2. High Threat of Increase in raw material price

a. Threat of New Entrant:

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In general, industries are more attractive when the threat of new entrant is low. This means that
competitors cannot easily enter the industry to copy what the incumbents are doing .In this food
industry, there is already lot of competitors exist who have greater financial resources,
economies of scale in purchasing & national advertising. Hop In Food stores need to compete
with these competitors. So, the threat of new entrant is very low. Because new venture may not
have available resources & other competitive strategy to compete with this already established
industry.

b. Threat of Substitute product:

Normally, Industries are more attractive when threat of substitutes is low. This means that
products & services from other industries cant easily serve as substitutes for the products &
services being made & sold in the focal firms industry. The industry where Hop- In Food Stores
belongs emphasized on the sale of beer & wine ; gasoline ; grocery ; soft drinks ; tobacco ;
health, beauty & household ; milk & dairy ; chips & snacks etc. The products have lot of
substitutes. Threat of substitute product is very high. From this point of view, the industry is not
more attractive.

c. Rivalry among existing firms:

In most industries, the major determinant of industry profitability is the level of competition
among the firms already exist .Some industries are fiercely competitive to the point where prices
are pushed below the level of costs .When this happens, industry wide losses occur. In other
industries, competition is much less intense & price competition is subdued .In this case, we
found that there is more competition among the firms. Hop- in Stores competed with local &
national chain groceries, supermarkets, drugstores, & similar retail outlets, most of which had
extended operating hours & expanded product lines in response to competition provided by
convenience stores.

d. Bargaining power of suppliers:

The presence of powerful suppliers reduces the profit potential in an industry. Suppliers
increase competition within an industry by threatening to raise prices or reduce the quality of
goods and services. Hop-In Food stores interested to issue new stock. So, new issue strengthened
the bargaining power with its lenders.

e. Bargaining power of buyer:

Normally, industries are more attractive when the bargaining power of buyers will be low.
Buyers can suppress the profitability of the industries from which they purchase by demanding
price concessions or increase in quality. Our relevant industry is retail food industry. Due to low
product differentiation & lot of available option bargaining power of the buyer is high here

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 Chapter 5
Company Analysis

3.1 Company profile:

Name of the company: Hop In Food Stores

Date of Incorporation: June 23, 1966

Founder of the company: John M. Hudgings, Jr

Main selling products: Traffic building items such as beer, soft drinks, cigarettes, wine, bread,
milk, gasoline, other dairy & bakery products.

Number of stores: 84 stores

Acquisition of stores: 58 stores (out of 84)

68 stores sold gasoline

Pumping and storage facilities provided by 19 stores out of this 68 stores owned by
Hop- In stores
Supplier owned 49 stores. From those, Hop In received rental commission.

Initial Main growth strategy: Acquisition of established stores.

Reason: Cost & risk of operating a new store to be greater than those of purchasing
an established one.

Investment banker: Scott & string fellow

Initial financing method: Long term loan & internal equity

Subsequent financing method: Addition of long term equity financing

Initial Public offering share issues: 60,000 shares

Number of shares after stock spilt (2 for 1): 124657 shares

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3.2 SWOT Analysis:

Strength:

Hop In Food Stores had grown through the acquisitions of established stores rather than
by internal expansion. Because Cost of establishing new firm is greater than the
acquisition.
New stores site were selected on the basis of residence density, the extent of street &
highway access & the proximity of competing stores.
Audited financial statements had been published each year.
Financial statements were prepared according to the generally accepted accounting
principles

Weakness:

Hop In Food stores incorporated has no fixed dividend policy.

At the end of 1976, the company purchased assets using short term debt.
Hop-Ins auditors were not one of the big eight firms

Opportunity:

Rebalancing capital structure through the new issues

New issues strengthen the companys bargaining power with its lenders
It would establish a trading market for managers, directors & employees who
participated in the companys ESOP program.
It would also simplify estate settlement in the case of death of a major stockholders
Publicly traded stocks would be a more effective tool for use in acquisition.

Threat:

Competitors had greater size, economies of scale in purchasing & national advertising.
Sales of grocery & other staple items were declining because of the increasing
competition within the retail food industry.
Failure to determine right stock price , Hop In Stores goodwill may damage & that
affect distribution network for future new issue
Capital structure balancing was threatened by the increasing number of acquisition

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 3.3 Ratio Analysis:
Liquidity ratios Numerator denominator value
Current ratio Current asset Current liability 0.82
Quick ratio Quick asset Current liability 0.14

The company has $0.82 current asset and $.014 Quick asset for each dollar of current liability.
The liquidity of the company is low because it does not have sufficient amount of assets to pepay
liabilities instantly.

Efficiency ratios Numerator denominator value

Accounts receivable turnover Credit sale Acc receivable 220.8 T
Accounts Payable turnover Cost of good sold Acc payable 8.05 T
Inventory Turnover Cost of good sold Inventory 7.34 T
Days accounts receivable outstanding 360 Acc rec turnover 1.63 D
Days accounts payable outstanding 360 Acc pay 44.72 D
turnover
Days inventory on hand 360 Inv Turnover 49.05 D
Total asset turnover Revenue Total asset 2.90 T

The company is managing its accounts receivable very tightly. It is very successful in chasing its
customer. Accounts receivables remain outstanding only for 1.63 days. Also it can manage a
lenient accounts payable terms from its suppliers so it can keep current liabilities outstanding for
44.72 days. Which means that they have a sound repaying history. But the inventory turnover
ratio of the company is fairly high. Inventories remain unsold for every 49.05 days.

In fine the cash conversion cycle is (Days accounts receivable outstanding-Days accounts
payable outstanding+ Days inventory on hand)= (1.63D - 44.72 D + 49.05 D)=5.92 D. Which
means, it takes almost 6 days to convert raw materials to sales proceeds.

Solvency ratios Numerator denominator value

Leverage ratio Total Asset Total equity 3.72
Working capital turnover ratio Sales Working capital 35.95

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The company has a leverage ratio of 3.72. which means the company is exposed to both upside
and downside risk of 3.72 times than an unlevered firm. The leverage will magnify the
possibility of gain and loss. The working capital ratio says that the firm can generate 35.95 times
sales for each dollar of working capital.

Profitability ratios Numerator denominator value

Net profit margin Net income Revenue 2%
Gross profit margin Net income Revenue 28%
Operating profit margin Net income Revenue 3.5%
Earnings per share Net income Share outstanding $4.68

The company has a gross profit margin of 28% but a net profit margin of 2% only. The operating
cost is very high in this industry. The company is in the growth stage so the are focusing on
gaining customer loyality than operational efficiency. Once the firm will enter to the mature
level, to exert the replacement demand, it will have to establish cost leadership by obtaining
economise of scale. The earning per share is $4.68 but as the company has huge growth
opportunities, the will retain most of its earnings and the shareholders will gain from capital
appreciation.

A Three stage DU Pont Analysis:

Return on Equity Net profit margin Total asset Turnover Financial leverage
ROE 2% 2.90 3.72

ROE= 21.58%. Financial leverage is the main contributor of the return on equity. The asset
turnover and net income has very little contribution in ROE. The leverage is magnifying the
small profit margin earned by the company. The firm is exposed to high risk because if there are
years when the net income is negative, the financial leverage will magnify that downside risk.

3.4 Valuation of common stock equity: Assumptions.

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Revenues:

Sales growth of grocery Sales growth of grocery items are expected to decline because
items of the firm is facing competition with their peer groups. the Hop
in food inc are facing increasing cost disadvantage. So we
expect sales growth will constantly decline by 5%.
Sales growth of gasoline The company is expanding its operation in selling gasoline both
item by acquisition and expansion. They are having a strong cost
advantage in selling gasoline than its peer groups. It will
experience a sharp growth of 7% for next 10 years. After that
they will enter into the transition stage and the growth rate will
decline to 5% for next 5 years. Ultimately the transition growth
will follow by a lower mature growth rate of 3% indefinitely.
This is because of the learning of its peers the techniques.

Cost:

Cost of goods sold Roughly we assume that COGS will remain 60% of the
revenue. Though because of experience the cost is expected to
decline in future, the increasing competition will gear up cost
further.
Selling and administrative Empirically it is found that selling and administrative expense
cost depends of the level of sales. Assuming that to be 25% of total
revenue.
Depreciation Depreciation expense will increase at the same rate as the
capital expenditure.

Interest expense As the firm is going public they will have an abundant access to
equity funding so they will require lesser and lesser debt capital
as well as loan from banks. We assume that borrowing amount
will decrease by 2% per year and so does the interest payment.

Tax expense Historically the tax rate of the company ranged from 20% to
38% so we assume the future tax rate will be (35%+ 20%+36%
+ 32%+ 38%)= 35% and for simplicity we assume that there is
no deferred tax asset and liability.

Changes in capital As the business is going public they will have greater fund
expenditure access and also they will have a number of profitable

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 investment opportunities. To be benefited from these windows
of opportunities they need to invest heavily in property plant
and equipment, intangible assets and real assets. We assume that
capx will increase by 15% per year for next 10 years. It will
enter the transition stage in year 11 and so the investment in
capx will grow only by 10%. These sharp growths will decline
to 5% at mature stage.

Changes in net working As the revenue is expected to grow ranging from 3% to 10 %.

capital We assume that on an average the net working capital will
increase by 3% for 10 years and 0% after that.

Cost of equity The sustainable growth rate calculated from the ROE and
retention ratio was 8%. It is so much intuitive that the terminal
growth rate of the company will be at least equal to the growth
rate of the country i.e. The GDP of the country. Again the risk
free rate government will offer to people for deferring
consumption will be at least equal to the GDP rate. So assume
the risk free rate is 8%.

The economy has just overcome recession and the inflation rate
is close to 6%. The economy is expected to experience an
expansion so the investor sentiment is optimistic and require
lower risk premium of 6%.

As the company is relatively new in public market and have a

heavy debt proportion in its capital structure, it will have a
above average risk than the market i.e. >1. We assume that
=1.2

So the cost of equity = 8% + 1.5(14%-8%)=17%.

Sustainable Growth rate When valuing the company, we estimated the net income and
derived the return on equity. Again we assumed that the
company is in the growth stage and have a number of profitable
investment opportunities.

To capitalize these windows of opportunities, the company is

expected to retain hundred percent of its net income and thus
have a dividend payout ratio 0% at least for 5 years. In the

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 transition stage (i.e. year 6 to year 15) it will start paying
dividend but it will be no more than 25% of earning. Finally
when it will reach to the mature stage, it will face chronic
competition and so will be left out with fewer profitable
investment opportunities. So the dividend rate will be as high as
50%. So our expected sustainable growth rate after year 20 will
be ROE*(1-Retention rate)= 0.1715*0.5=8%.

Relative Valuation Assumption:

Dividend Payout Ratio When valuing the company, we estimated the net income and
derived the return on equity. Again we assumed that the
company is in the growth stage and have a number of profitable
investment opportunities.

To capitalize these windows of opportunities, the company is

expected to retain hundred percent of its net income and thus
have a dividend payout ratio 0% at least for 5 years. In the
transition stage (i.e. year 6 to year 15) it will start paying
dividend but it will be no more than 25% of earning. Finally
when it will reach to the mature stage, it will face chronic
competition and so will be left out with fewer profitable
investment opportunities. So the dividend rate will be as high as
50%.

Industry Average Share The industry consists of 6 companies South Land, Munford,
Price Dillon, Sunshine Jr., National Store, Circle K. The average price
of the industry is the mean price of all these companies.

Industry Average EPS The industry consists of 6 companies South Land, Munford,
Dillon, Sunshine Jr., National Store, Circle K. The average EPS
of the industry is the mean EPS of all these companies.

Dividend growth rate As the company is in the growth stage they will have a number
of investment opportunities in hand to capitalize those windows
of opportunities they will retain most of their dividends they
will start paying dividend after entering the transition stage.
After that when the company enters the mature stage they will

21
 pay greater amount of dividend to share holder.

Growth Rate Year

0% 1-5

30% 6-12

15% 13-20

8% Indefinite

Recommended price
Free cash flow to equity Free cash flow to equity measures
the capacity of the company to $49.47
pay dividend.
Dividend discount model Dividend discount model measures
the expected dividend payment of
the company. $23.19

P/E ratio valuation model P/E ratio valuation model derives

the value of the company by
$17.18
comparing the industrys P/E ratio
with the companys EPS. which
follows the 'Law of one price'.
Average price $29.95

Evaluating all the alternatives we conclude that the intinsic value of the share is $29.95. The
market price of the share is $9.5. which means the share is undervalued.

22
 Conclusion
In our opinion, the investment bank is in a comfort zone because as the shares are undervalued,
they have potential growth opportunities. Even if they cannot sell all the shares, holding the
shares can be profitable for investment bank. Because the shares are expected to generate above
average return in future. The issuer is getting fixed $10 per share before adjustment for
commission expense and holding its risk but they are foregoing the benefit of Best effort basis
selling of share. They would get higher sale proceed in that case but not without the risk of under
subscription.

The end

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