Andrea Rietveld, Blake Kelly Cara Achterhof, Cori Cooper Phil Barkel, Lee Finch December 8th, 2011

Gentex Report Objective: Our objective is to compute the Market Capital Rate (MCR) and the Required Rate of Return (RRR). The stock that we chose to analyze is the Gentex Stock. After computing these two numbers we are able to compare the two and see whether or not this is a good investment. Numerical analyzing shows a companies character and their financial status providing beneficial information. Gentex Corporation is a company that specializes in highly automated electronics, CMOS camera development and manufacturing, vacuum coatings, and glass bending and fabrication. They work with the automotive, aerospace, and fire protection industries. Director of the Officers is Fred Bauer, director since 1981. Senior Vice President is Enoch Jen and Mark Newton. We chose Gentex due to their innovative practices, representing the positive growth a company can make when innovation is key. Gentex has recently hired in a couple hundred employees, showing the growth of a company. This caused us to look into the possibility of investing in Gentex. Data: In order to determine the Market Capitalization Rate (MCR) and Required Rate of Return (RRR), certain data was necessary for variables in the calculations. Yahoo Finance was used to find the closing stock prices of both the stock and the NASDAQ composite index between the dates of September 1st, 2010 and August 31st, 2011. This data was used to find the Beta of the stock, which was found by running a regression analysis in Microsoft Excel. In order to find the

dividend value for period one (D1), the average growth rate and the dividend amount at time period zero (D0) needed to be determined. These values can be determined only with additional financial data from Gentex Corp, which was also found using Yahoo Finance. This data includes: Earnings per Share (EPS (diluted, ttm)), Return on Equity (ROE), Payout Ratio, Analysts Estimate of Earnings Growth (next 5 years), and price on August 31, 2011. Finally, the value for the risk free investment interest rate on August 31, 2011 was given to us in class, but can also be found using Yahoo Finance. This value is used in determining Required Rate of Return. Methodology: There are two methods used in solving for required rate of return and market capitalization rate. The equation used to compute the required rate of return is the Capital Asset Pricing Model (CAPM). The equation is as follows: E(Rs)=E(Rf)+Bs * [(E(Rm)-E(Rf)]. E(Rs) is the return we should expect from the stock, known as the required rate of return. Rf is the percent of return we should expect to receive from a similar risk free investment such as a Treasury Bill. Bs is the non-diversifiable risk on the stock which is found by taking the covariance of the stock and the market and dividing by the variance of the stock. E(Rm)-E(Rf)is the premium we should get per unit of beta or also known as the market risk premium. This is found by taking the average expected return on the market minus the percent of return we should expect to receive from a risk free investment. The equation to compute the MCR is as follows: MCR= (D1/Po) + g. D1 is found by taking the current dividend paid by Gentex and using the follow equation: D1=D0*(1+g). D1 is the dividend that will be paid at the end of the year. G stands for the the percent of growth the dividend will increase each year. The current dividend paid by the company is D0 and solved by

using the equation: D0= Payout Ratio * Earnings Per Share. The growth rate equation is g=ROE * (1-payout ratio). Empirical Findings: The process of calculating the market capitalization rate begins with multiplying the payout ratio, .41, by the earnings per share, $1.12, which gives the dividend paid out in the current period;$.46. Multiplying the return on equity, .1777, by 1 minus the payout ratio, .59, gives the dividend growth rate based on the return on equity; which is .1048 or 10.48%. By adding the dividend growth rate based on the return on equity, 10.48%, to our analyst estimated growth rate of 20.58%, and dividing the sum by 2, we calculated our average growth rate of 15.53%. We find the dividend for period 1 by taking the current dividend, $.46, and multiplying it by 1 plus the average growth rate, 1.1533; this shows the dividend paid in period 1 will be $.53. We find the market capitalization rate by dividing the dividend paid in period 1, $.53, by the adjusted closing price of Gentex stock on August 31, 2011; $25.95, and adding the average growth rate of 15.53%. By calculating that out we find that the market capitalization rate is .1757 or 17.57%. In finding the required rate of return, we first find the market risk premium by subtracting the risk free rate, .2%, from the expected return on the market, 7%; which comes to 6.8%. We then multiply that by the beta calculated in our data analysis, 1.34, and add back the risk free rate, .2%; calculated out, we find the required rate of return to be 9.31%. Conclusion: According to our calculations, investing in Gentex would be a wise choice. Gentex is showing signs of growth and their MCR is 8.26 points higher than the required rate of return(RRR= 9.31% : MCR= 17.57%). This is a fantastic return and the stock is significantly

underpriced. Any wise investor would eagerly buy into Gentex Corporation. Appendix The following pages provide the data sets.