Valuation of Shares and Returns: A Case Study of Encore

CASE STUDY
ENCORE
STUDENT ID:
[Pick the date]

Introduction
The key objective in the given case is to highlight how the valuation of shares and the
underlying returns that the shareholders may expect tend to get altered by the key business
decisions that the company makes. These computations have been provided for the casual
wear company Encore on the basis of the information provided in the case study.
Analysis
a) The book value per share needs to be determined for which the following formula may be
deployed (Damodaran, 2015).
Book value per share = Book value of common share equity/Total number of common shares
outstanding
Based on the input data, book value of common share equity = $ 60,000,000
Total number of common shares outstanding = 2,500,000
Hence, book value per share = 60,000,000/2,500,000 = $ 24
b) The P/E ratio can be estimated using the following formula (Parrino & Kidwell, 2014).
P/E ratio = Price per share/Earnings per share
Price per share = $ 40
Earnings per share = $ 6.25
Hence, P/E ratio = 40/6.25 = 6.4
c) In the given case, CAPM approach or Capital Asset Pricing Model would be deployed for
computation of the required return by equity shareholders. The requisite equation of this
model is indicated as follows (Petty et. al., 2015).
Expected return on equity = Risk free rate + Beta * Risk premium