Pinho directs Silveira to use a valuation metric that would allow for a meaningful ranking of relative value of the three companies’ shares. Exhibit 1 provides selected financial information for the three companies.
Exhibit 1
Selected Financial Information for Adesivo, Enviado, and Gesticular (Brazilian Real, BRL)
Adesivo | Enviado | Gesticular | |
Stock’s current price | 14.72 | 72.20 | 132.16 |
Diluted EPS (last four quarters) | 0.81 | 2.92 | −0.05 |
Diluted EPS (next four quarters) | 0.91 | 3.10 | 2.85 |
Dividend rate (annualized most recent dividend) | 0.44 | 1.24 | 0.00 |
Silveira reviews underlying trailing EPS for Adesivo. Adesivo has basic trailing EPS of BRL0.84. Silveira finds the following note in Adesivo’s financial statements:
“On a per share basis, Adesivo incurred in the last four quarters
i. from a lawsuit, a nonrecurring gain of BRL0.04; and
ii. from factory integration, a nonrecurring cost of BRL0.03 and a recurring cost of BRL0.01 in increased depreciation.”
Q. Based on Exhibit 1 and the note to Adesivo’s financial statements, the trailing P/E for Adesivo using underlying EPS is closest to:
- 17.7.
- 18.2.
- 18.4.
3 is correct. The EPS figure that Silveira should use is diluted trailing EPS of BRL0.81, adjusted as follows:
- Subtract the BRL0.04 nonrecurring legal gain.
- Add BRL0.03 for the nonrecurring factory integration charge.
Therefore, underlying trailing EPS = BRL0.81 – BRL0.04 + BRL0.03 = BRL0.80 and trailing P/E using underlying trailing EPS = BRL14.72/BRL0.80 = 18.4.
Doubt – why the EPS of 0.81 is used instead of 0.84?
Because we are supposed to use diluted EPS and not the Basic EPS.