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Use the Gordon’s growth model to determine the fair value of Esprit Holdings Ltd. Gordon’s growth value is chosen because it uses data that can be easily found or calculated with little chance of error. Assumptions 1. Dividend growth rate is constant 2. Return on equity is constant and sustainable 3. Forecasted dividend is accurate 4. There is market stability 5. Historical data is reasonable predictor of future returns Valuation Esprit Holdings Ltd 0330. HK (Hong Kong) All data taken from Esprit’s 2007 Annual report Current share trading price = $92. 5 Dividends per share = $3. 18 Earnings per share = $4. 22 Return on Equity = 48. 9% Payout Ratio = 3. 18/4. 22 = . 754 g = (1 – . 754). 489 = . 12029 PT = d1/(re-g) Assume that Giordano and Esprit have the same re Find the re for Giordano based on current share price Giordano International Ltd 0709. HK (Hong Kong) Dividend per share = 22 cents Earnings per share = 19. 8 cents Return on Equity = 15. 7 % Current share trading price = $3. 29Payout Ratio = . 22/. 198 = 1. 111 g = (1-1. 111). 157 = -. 01743 PT= d1/(re-g) 3. 29 = . 22/[re- (-. 017)] re = . 2/3. 29 +. 017 = . 04987 Calculate Esprit’s Pt using Giordano’s re of 5% PT= d1/(re-g) PT= 3. 18/ (. 05 – . 12) = -45. 43 Using the re of Giordano, Esprit should have a stock price of $-45. 43 This value breaks the basic assumption that re should be greater than g therefore the assumption that Giordano shares a similar cost of capital to Esprit is invalid. Taking a CAPM approach to calculate re E(re) = rf + ? (E(rm- rf)) ? = . 61 (as listed by reuters) rf = . 0258 rm= . 2228 (as determined in appendix A through a 2 year average) E(re) = . 0258 + . 61 (. 228 – . 0258) = . 146 Calculate PT using re= . 146 PT= 3. 18/ (. 146 – . 12029) = 123. 69 Therefore the stock price using a CAPM valuation is $123. 69 Findings The calculated value of Esprit at $123. 69/share is over the market value of $92. 55. The calculated value is within the 52 week high of $131. 22/share.The possible reasoning behind a lower market capitalization could be higher volatility in the market as well as rising costs associated to rent. References: HANG SENG INDEX (^HSI). 2008. Yahoo Finance. [Internet]. Available at: http://finance. ahoo. com/q/hp? s=^HIS [Accessed 12 April 2008]. Esprit Holdings Ltd 0330. HK (Hong Kong). 2008. Reuters. [Internet]. Available at: http://stocks. us. reuters. com/stocks/ratios. asp? symbol=0330. HK [Accessed 12 April 2008]. Giordano International Ltd 0709. HK (Hong Kong). 2008 Reuters. [Internet]. Available at: http://stocks. us. reuters. com/stocks/overview. asp? symbol=0709. HK [Accessed 12 April 2008]. FY2006/2007 Annual Report. 2008. Esprit. [Online]. Available at: http://www. esprit. com/index. php? command=ItemDownload&class=Esprit_Mod

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