Equity analysis: OfficeWarehouse (OFW) is an Australian company that provides office supplies, ranging from office furniture, electronic equipment and stationery. The company operates over 500 stores across Australia. Some regional locations are owned by OFW, but most are on medium-term commercial rental contracts. Using the last 2 years of daily data, the company is reported to have a beta of 0.8 compared to the ASX200. The annual risk-free interest rate is 2.0% and the expected rate of return on the market is 9% p.a. The price of OFW at the beginning of the year (2020) was $18.5. Dividends are expected to be $0.40 per share at the end of year.
A) What price do investors expect the stock to sell for at the end of the year if they believe in the CAPM? (keep the answer to the nearest 2 decimal places)
B) An analyst has forecast the following for OFW: Due to the coronavirus, FCFE will drop by 5% every year for the next two years (year 2021 and 2022), after which FCFE is expected to grow at 4% per year forever.
B1) The FCFE of the company at the end of the year (2020) is expected to be $400 million with 550 million shares outstanding. What is the fair value per share at the beginning of 2020 according two-stage growth model? (Keep the answer to the nearest 2 decimal places)
B2) Assume that the firm applies a plowback ratio of 0.3 before paying dividends at the end of this year, using the answer from question B1, what is the firm’s PVGO at the beginning of 2020? (Keep the answer to the nearest 2 decimal places)
B3) You intend to buy the stock at the end of 2020. Your friend believes that the firm will fail to achieve any forecasted growth (g=0). What will be the P/E ratio of OFW at the end of this year, assuming market price follows CAPM (round to 2 decimal places). How long does he think you should expect to recover your initial investment by dividends, ignoring time value of money and capital gain? (Answer in years and round to the nearest integer)
C) Do you think OFW belongs to a defensive or cyclical sector? Why?
Answer only part B3 and part C . Thanks