In the world of trend-setting fashion, instinct and marketing savvy are prerequisites to success. Jordan Ellis had both. During 2011, his international casual- wearcompany, Encore rocketed to $300 million in sales after 10 years in business. His 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 an Encore shop every five or six blocks, each featuring a different colour. Some showed the entire line in mauve, and others featured it in canary yellow.
Encore had made it. The company’s historical growth was so spectacular that had no one could have predicted it. However, securities analysts speculated that Encore could not keep up the pace. Theywarned that competition is fierce in the fashion industry and that the firm might encounter little or no growth in the future. They estimated that stockholders also should expect no growth in futuredividends.
Contrary to the conservative securities analysts, Jordan Ellis felt that the company could maintain a constant annual growth rate in dividends per share of 6% in the future, or possibly 8%for the next 2 years and 6% thereafter. Ellis based his estimates on an established long-term expansion plan into European and Latin American markets. Venturing into these markets was expected to causerisk of the firm, as measured by beta, to increase immediately from 1.10 to 1.25.
In preparing the long-term financial plan, Encore’s chief financial officer has assigned a junior financial analyst,Marc Scott, to evaluate the firm’s current stock price. He has asked Marc to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder,Jordan Ellis.
Marc has compiled these 2011 financial data to aid his analysis:
Data item 2011 value
Earnings per share ...