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Simple Analysis and Parsimonious Forecasting

Simple Analysis and Parsimonious Forecasting. Vernon Gair. Previous Module Summary. About the Company.

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Simple Analysis and Parsimonious Forecasting

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  1. Simple Analysis and Parsimonious Forecasting Vernon Gair

  2. Previous Module Summary

  3. About the Company • Aéropostale, Inc. is a primarily mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aéropostale stores and 4 to 12 year-old kids through its P.S. from Aéropostale stores.

  4. 1 Yr. Stock Chart

  5. Measures of Performance

  6. Implied Price Per Share

  7. DCF Valuation

  8. COST OF CAPITAL AND VALUATION

  9. Weighted Average Cost of Capital

  10. Bloomberg WACC Calculation

  11. Bloomberg WACC Inputs

  12. Analysis and Assumptions • 15.8% WACC Used per Bloomberg Estimates • Raw Beta of about 2.0 leads to high cost of equity due to riskiness of the stock. • Equity Risk Premium Seems High at 7.87% • Bloomberg Equation • WACC=ke= • WACC needs to be recalculated/proven

  13. Cost of Equity

  14. Bloomberg 2 Yrs. Weekly Beta

  15. Bloomberg 5 Yrs. Monthly Beta

  16. Beta Estimates • http://www.google.com 1.58 • http://www.nasdaq.com 1.26 • http://investing.money.msn.com 1.58 • http://www.reuters.com 1.95 • http://finance.yahoo.com2.71 • http://research.scottrade.com 1.90 • http://finance.comcast.net 1.95 • http://www.zacks.com 1.58 • http://www3.valueline.com1.10

  17. Beta Regression

  18. Ke Calculation

  19. Cost of Debt

  20. Analysis and Assumptions • $0 Debt on the balance sheet • Led to NFA instead of NFL • Bloomberg gave $0 weight to Debt in WACC Calculation • Interest expense driven by operating leases • Adjustment to capitalize leases will give a better estimate of the true cost of ARO’s debt

  21. Kd Calculation

  22. Conclusion

  23. Recalculation of WACC

  24. DCF Valuation

  25. DCF Valuation

  26. Conclusion • The recalculated WACC is a better estimate of the actual cost of capital for ARO • The cost of debt is not accurately reflected as it does not include the operating leases • Recalculated DCF Valuation increases implied price per share to $6.59

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