Question #124

of 140 Glad Tidings Gifts (GTG) recently reported annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG's trailing price to earnings (P/E) for valuation purposes? A) 22.22. B) 19.69. C) 25.51. Victoria Banks is a senior analyst working for a large firm of portfolio managers. Her manager, David Alan, has asked her to report on a company called Retro Inc. as he believes it might offer a potentially good investment. The accounts for Retro Inc. are given below. Retro prepares its accounts using U.S. GAAP. Exhibit 1: Retro Inc. Balance Sheet as at 31 December 20x9 $m 20x8 $m Assets Cash 150 100 Accounts receivable 1,700 1,620 Inventory 1,810 1,800 Total current assets 3,660 3,520 Property, plant, and equipment 1,430 1,000 Intangibles 100 150 Total assets 5,190 4,670 Liabilities and Capital Notes payable to banks 200 220 Accounts payable 1,330 1,200 Interest payable 130 100 Total current liabilities 1,660 1,520 Long-term debt 770 680 Deferred tax 820 790 Common stock 1,300 1,300 Retained earnings 640 380 Total liabilities and capital 5,190 4,670 Exhibit 2: Retro Inc. Income Statement for the Year Ended 31 December 20x9 $m Sales 3,000 Cost of goods sold (1,800) Gross profit 1,200 Depreciation (150) Amortization (50) SG&A (280) Gain on disposal 30 Restructuring charge reversal 20 Interest expense (190) Income tax expense (223) Net income 357 Retro disposed of PPE in the year that had a cost of $150m and accumulated depreciation at the time of disposal of $90m. No intangibles were disposed of during the year. Deferred tax liabilities are not expected to reverse for the foreseeable future. Banks is also concerned that the net income looks relatively high when compared to previous years and therefore wants to measure the quality of earnings. She has heard that the lower the accruals ratio the higher the quality of earnings. Banks calculates that Retro Inc. has a leading P/E ratio of 4.29 and a five-year consensus growth rate forecast at 14.85%. The median PEG, based on leading P/E, for a group of companies comparable in risk to Retro Inc. is 0.82. Based on this Banks wants to determine whether the stock is correctly priced. One of Banks's colleagues, Jennifer Cery, comments that P/E multiples are not always that useful and that sometimes enterprise value multiples are better. She makes the following comments: Comment 1: Enterprise value multiples are useful when comparing firms with different degrees of financial leverage and when EPS is negative. Comment 2: As EBITDA can be used as a proxy for free cash flow to the firm providing depreciation is close to capital expenditure and the firms levels of working capital is relatively constant.