Reference no: EM132550800
Question 1. Using Comparables to Value DNKN and TXRH
Reassess our previous valuations for Dunkin Brands (DNKN) and Texas Roadhouse (TXRH). The valuation ratios from the six peer firms and the fundamentals for DNKN and TXRH are given below. The peer firms are Yum! Brands (YUM), McDonald's (MCD), Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ), Starbucks (SBUX), and Wendy's (WEN).
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Ratio
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YUM
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MCD
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CMG
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DPZ
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SBUX
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WEN
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Trailing PE
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14.99
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22.38
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67.64
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40.62
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17.97
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9.07
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Forward PE
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24.37
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21.95
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52.64
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32.54
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22.70
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31.72
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Price/Sales
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4.61
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5.95
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2.77
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3.87
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3.33
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3.22
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Price/Cash flow
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13.26
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18.28
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37.11
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35.43
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19.76
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23.94
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Dividend yield %
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1.73
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2.39
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0.00
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0.81
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2.12
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1.92
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PEG ratio
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1.22
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2.68
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2.98
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1.77
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1.13
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3.85
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Market cap $bil
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27.20
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133.10
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12.50
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11.50
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78.90
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4.10
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Fundamental
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DNKN
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TXRH
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Trailing EPS
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2.30
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2.08
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Forward EPS
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2.73
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2.40
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Sales/Share
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11.65
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31.94
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Cash flow/Share
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2.99
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3.19
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Dividend per share
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1.39
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1.00
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Market price $
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67.12
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63.87
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Use only the information from four of the peers (YUM, MCD, SBUX, and WEN) to do the analysis below. (Delete CMG and DPZ from the set of peers).
A. Calculate the mean and median valuation ratios for the six peer firms
B. Using the median ratios for the peer firms, calculate the indicated prices for DNKN and TXRH.
C. Calculate a weighted average price for DNKN and TXRH using a 0.40 weight for the indicated price from the forward PE and a 0.15 weight for the prices indicated by the other four ratios.
D. If you use the mean values of the peer ratios instead of the medians, would this increaseor decrease the weighted average prices for DNKN and TXRH?
Question 2. Using the residual income model to value Hess Electrical Contractors. ValueHess Electrical with the residual income method. You have assembled the following information and assumptions for your analysis.
• Book value per share is $20.00
• EPS will be 20% of beginning book value for the next ten years
• Cash dividends will be 40% of EPS each year
• At the end of ten years, market price per share will be 1.8 times book value per share
• The Hess beta 0.9, the risk-free rate is 3.0%, and the equity risk premium is 5.0%
1. Prepare a table showing, for each year, the beginning and ending book values, net income per share, dividends per share, residual income, and the present value of residual income.
2. Estimate the per share value of REM stock using the residual income model.
3. Estimate the per share value of REM stock using the dividend discount model.
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