FINC Case Study

FINC Case Study

Example of Case Study Write-upCase Study: Gilbert Enterprises

Submitted by: James Bunsa

For: FINC 5880

Date: 11 Apr 2014

a. Current Situation

Company I nformationGilbert Enterprises, the third largest publicly traded firm in the auto parts replacement industry, had experienced a decline in its stock price over the past five months. Its founder and chairman, Tom Gilbert, along with the Finance VP, were considering a stock repurchase, thinking the announcement would send a message to investors about the current market undervaluation of the stock.

Industry and Economic InformationResearch had indicated that auto owners were keeping their vehicles longer (8 years on average, up from 6.8 years twenty years earlier), and new vehicle price increases had surpassed the rise in consumer incomes. The trend of investing in older vehicles to keep them on the road longer would bode well for Gilbert. In addition, Gilbert had invested in an industry-leading JIT inventory management system and as a result expected supernormal growth over the next several years.

b. Major Issues

Several significant issues that Gilbert faces include:

· Develop these issues preliminarily, and readdress/refine them after answering the case-specific questionsDoes the growth rate seem reasonable, given the current and expected circumstances (economic and industry)?

· Does the current stock price fairly represent Gilbert’s value in the market?

· What is the “real” value of Gilbert’s stock? And how should it be determined (methods, process)?

· What other data should be considered in the valuation?

· What decision should they make – repurchase stock or do something else?

· What are the possible investor and market reactions to an announcement?

· Other issues ….

c. Approach

Identify the appropriate analytical techniques (dividend valuation model) to evaluate Gilbert’s value in the market; use a price-earnings approach to supplement the dividend model results; and use selected ratio comparative analysis to fairly position Gilbert against its competitors; and specifically answer the case questions.

d. Case-specific Questions

1. Supernormal growth valuation – does the firm seem to be under or overvalued?

Three steps to find intrinsic value, and then compare to market.

· Find present value of supernormal dividends

Discount future supernormal dividends back to present at 10% (required rate of return)