Case Solution - Topic 7 (Stock Valuation)

# Case Solution - Topic 7 (Stock Valuation) - So the industry...

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CHAPTER 7 STOCK VALUATION AT RAGAN THERMAL SYSTEMS 1. The total dividend paid by the company were \$108,000. Since there are 100,000 shares outstanding, the total earnings for the company were: Total earnings = 100,000(\$4.32) = \$432,000 This means the payout ratio was: Payout ratio = \$108,000/\$432,000 = 0.25 So, the retention ratio was: Retention ratio = 1 – .25 = 0.75 Using the retention ratio, the company’s growth rate is: g = ROE × b = .25(.75) = .1875 or 18.75% The dividend per share paid this year was: D 0 = \$54,000 / 50,000 D 0 = \$1.08 Now we can find the stock price, which is: P 0 = D 1 / (R – g ) P 0 = \$1.08(1.1875) / (.20 – .1875) P 0 = \$102.60 2. Since Expert HVAC had a write off which affected its earnings per share, we need to recalculate the industry EPS. So, the industry EPS is: Industry EPS = (\$0.82 + 1.32 + 0.97) / 3 = \$1.04 Using this industry EPS, the industry payout ratio is: Industry payout ratio = \$0.36/\$1.04 = .3473 or 34.73%

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Unformatted text preview: So, the industry retention ratio is Industry retention ratio = 1 – .3473 = .6527 or 65.27% CHAPTER 7 C-2 This means the industry growth rate is: Industry g = .13(.6527) = .00849 or 8.49% The company will continue to grow at its current pace for five years before slowing to the industry growth rate. So, the total dividends for each of the next six years will be: D 1 = \$1.08(1.1875) = \$1.28 D 2 = \$1.28(1.1875) = \$1.52 D 3 = \$1.52(1.1875) = \$1.81 D 4 = \$1.81(1.1875) = \$2.15 D 5 = \$2.15(1.1875) = \$2.55 D 6 = \$2.55(1.0849) = \$2.77 The stock price in Year 5 with the industry required return will be: Stock value in Year 5 = \$2.77 / (.1167 – .0849) = \$86.97 This means the total value of the stock today is: P = \$1.28/1.1167 + \$1.52/1.1167 2 + \$1.81/1.1167 3 + \$2.15/1.1167 4 + (\$2.55 + 86.97) / 1.1167 5 P = \$56.61...
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Case Solution - Topic 7 (Stock Valuation) - So the industry...

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