Even though the operating performance of Innovative Chemical Corporation (ICC) has been outstanding, there are some problems in respect of the share price appreciation. Firstly, PIE ratio will be used to evaluate the company’s stock and factors which affect company’s PIE ratio will be listed. Furthermore, discounted dividend valuation model will be demonstrated and fundamental factors which Impact the share pricing will be analyses. Finally, the value of ICC at 30 June 2010 will be calculated using PIE ratio and EDM model.
Meantime, the weakness of those two models will be illustrated, and alternative methodology will be applied to calculate the intrinsic valuation of ICC and then compare the result with closing price on 30 June 2010. 2. PIE ratio There are two important factors will affect PIE ratio of a company, which is risk and growth opportunity. Since the company’s PIE ratio Is higher than that of other companies, which means the less risk the Investment will be In this company. The other factor is growth opportunity: the company’s PIE ratio is higher than that of there companies’ PIE ratio, which means the company has a substantial opportunity for growth.
In that case, the current earning level is probably to be exceeded in the future, therefore when you evaluate a price today that will be “high” relative to current earning. Moreover, other factors should be taken account are the prospect of the company and the economy of market conditions, 3. Discounted deemed model P – D/k-g The factors fundamental in share pricing, as implied by the discounted dividend valuation model is dividend, growth rate and the required rate of return. Other factors impact the share price are the size of expected future cash streams. . G periodic earnings PEPS, retention policy (retained earnings), payout policy (dividends policy) and earnings quality (sustainability, growth, etc),and market Interest rates, which Is shown In the table that cash flow per share Include Market risk premium and relevant risk (e. G. Systematic beta risk). Pricing model (e. G. CAMP). According to this table, we find that the net income increase from 24. 442 to 70. 221 in 2005 and 2010, the share price increase from 5. 81 to 58. 0 in 2005 and 2010 as well.
According to the calculation of PIE ratios for ICC in these years are higher than the average annual PIE ratio, which means that the company overpricing his share price. Obviously, the dividend payout ratio at the same time appear In city Is filled with the molecular formula with the denominator. At the molecular, dividends payout ratio, the bigger the current dividend level higher, the greater the PIE ratio: But in the denominator, dividends payout ratio, the bigger the dividend growth rate is lower, the smaller the PIE ratio.
