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MBA 737 StockWorksheet Hinson Assignment 2-3

# MBA 737 StockWorksheet Hinson Assignment 2-3 - Name_Jamie...

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Name _Jamie Hinson______________ Assignment 2-3 Worksheet Read the Closing Case entitled Stock Valuation at Ragan Thermal Systems on pp. 204-205 Corporate Finance: Core Principles and Applications and answer the six questions posed on this sheet. 1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock? (Hint: Solve for g using Eq. 6.8, and then apply the constant dividend growth model.) EPS 0 (1 + g) 9 = EPS 9 \$1.97 (1 + g) 9 = \$5.08 (1 + g) = (5.08/1.97)1/9 g = 1.11099 – 1 g = 11.099% Value per share of company’s stock P0 = D1/ k – g = 5.08*1.11099/ (0.25 – 0.11099) = 5.6438/ 0.13901 = \$40.60 ________ 2. Dan believes that Ragan’s technological advantage will only continue for the next 5 years and then the company’s growth rate will likely slow to the industry average. He also believes the company’s required rate of return is too high and that the industry average is more appropriate. Based on the above, what is Ragan’s estimated stock price? (Hint: Calculate the industry EPS to reflect an EPS of \$1.97 for Nautilus Marine Engines. Solve for industry g and then apply the differential dividend growth model per the consultant’s assumptions about growth.) Carrington 150,000 Genevieve 150,000 Required rate of return 20% Return on equity 25%

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MBA 737 StockWorksheet Hinson Assignment 2-3 - Name_Jamie...

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