R.A. Nixon put out a "strong buy" on DuPoTex (DPT). This company has a current stock price of $88.00 per share. The company has sales of $210 million, net income of $3 million, and 300 million outstanding shares. DPT is not paying a dividend. Dorothy Josephson has argued with Nixon that DPT"s valuation is excessive relative to its sales, profits, and any reasonable assumptions about future possible dividends. Josephson also asserts that DPT has a market value equal to that of many large blue-chip companies, which it does not deserve. Nixon feels that Josephson"s concerns reflect an archaic attitude about equity valuation and a lack of understanding about DPT"s industry.
A. What is the total market value of DPT"s outstanding shares? What are the price-to earnings and price-to-sales ratios?
B. Nixon and Josephson have agreed on a scenario for future earnings and dividends for DPT. Their assumptions are that sales grow at 60 percent annually for four years, and then at 7 percent annually thereafter. In Year 5 and thereafter, earnings will be 10 percent of sales. No dividends will be paid for four years, but in Year 5 and after, dividends will be 40 percent of earnings. Dividends should be discounted at a 12 percent rate. What is the value of a share of DPT using the discounted dividend approach to valuation?
C. Nixon and Josephson explore another scenario for future earnings and dividends for DPT. They assume that sales will grow at 7 percent in Year 5 and thereafter. Earnings will be 10 percent of sales, and dividends will be 40 percent of earnings. Dividends will be initiated in Year 5, and dividends should be discounted at 12 percent. What level of sales is required in Year 4 to achieve a discounted dividend valuation equal to the current stock price?