KAZWEAR GLOBAL 2023
Maya Markam had the talent and marketing savvy to succeed in the global fashion market. In 2022, her casual-wear company, KAZWEAR GLOBAL, had record sales of $80 million after only 5 years in business. Her fashion line covered the young woman from head to toe with hats, sweaters, dresses, blouses, skirts, pants, sweatshirts, socks, and shoes. In Manhattan, there was a KAZWEAR shop every five or six blocks, each featuring a different colour. Some shops showed the entire line in pink, another featured it in green, etc. KAZWEAR had made it to the top.
The company’s historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that KAZWEAR could not keep up the pace. They warned that competition is fierce in the fashion industry and that the firm might encounter little or no growth in the future. They were of the view that stockholders should not expect any growth in future dividends.
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Contrary to the conservative securities analysts, Maya felt that the company could maintain a constant annual growth rate in dividends per share of 7% in the future, or possibly 10% for the next 3 years and 6% thereafter. Maya based her estimates on the planned expansion into European and Latin American markets. Venturing into these markets was expected to increase the β on KAZWEAR’s stock from the current level of 2 to 4. The risk-free rate is 6% and the market return is 12%.
In preparing the long-term financial plan, KAZWEARE’s Chief Financial Officer has assigned a junior financial analyst, Jenny Joseph, to evaluate the firm’s current stock price. He asked Jenny to consider the conservative predictions of the securities analysts and the bold predictions of the company founder, Maya Markam.
KAZWEAR’s Earnings per Share, Dividends per Share, and Price per Share at the end of 2022 were $24, $15, and $98 respectively. The Balance Sheet is given in Table 1.
Required:
1. What is the company’s current book value per share?
2. What is the company’s current P/E ratio?
3 (a) What is the current Required Rate of Return for KAZWEAR’s shares?
(b) What will be the new required return for KAZWEAR shares assuming that they expand
into European and Latin American markets as planned?
4. If the securities analysts are correct and there is no growth in future dividends,
what will be the value per share of KAZWEAR? (Note: Use the new
required return on the company’s shares here.)
5. (a) If Maya’s predictions are correct, what will be the value per share of KAZWEAR’s shares
if the firm maintains a constant annual 7% growth rate in future dividends? (Note:
Continue to use the new required return here.)
(b) If Mary’s predictions are correct, what will be the value per share of KAZWEAR’s shares
if the firm maintains an annual growth rate of 10% in dividends per share over the next 3
years and 6% thereafter?
6. Compare the current (2022) price of the shares and the share values found in parts 1, 4,
and 5.
a. Discuss why these values differ.
b. Which valuation method do you believe most closely represents the true
value of the KAZWEAR’s shares? Explain.
Table 1
KAZWEAR GLOBAL
Balance Sheet
As at December 31, 2022
($000)
Assets
Cash
$ 1,600
Marketable Securities
4,000
Accounts Receivables
8,000
Inventories
15,000
Total Current Assets
$ 28,000
Gross Fixed Assets
20,000
Less Accumulated Depreciation
10,000
Net Fixed Assets
10,000
Total Assets
$ 38,000
Liabilities and Stockholders’ Equity
Accounts Payable
$ 2,400
Notes Payable
3,000
Accruals
600
Total current liabilities
6.000
Long Term Debt
10,000
Total Liabilities
16,000
Common Stock (Par Value $10)
10,000
Paid in Capital in excess of par
6,000
Retained Earnings
6,000
Total Stockholders’ Equity
22,000
Total Liabilities and Stockholders’ Equity
$ 38,000
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