Stock Valuation at Ragan, Inc,,1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock?,,2. To verify their calculations, Ragan, Inc. has hired an equity analyst familiar with the HVAC industry who has examined Ragan Inc.’s financial statements as well as those of its competitors. Although Ragan, Inc. currently has a technological advantage, the consultant’s research indicates that other companies are investigating methods to improve efficiency and the consultant believes that Ragan’s technological advantage will only last for the next five years. After that period, the company’s growth will likely slow to the industry growth average. Additionally, the consultant believes that the required return used by Ragan, Inc. is too high and that the average required return rate is more appropriate. Under this growth rate assumption, what is your estimate of the stock price?,,3. What is the industry price-earnings ratio? What is the price-earnings ratio for Ragan, Inc.? Is this the relationship you would expect between the ratios? Why or why not?,,4. Carrington and Genevieve are unsure how to interpret the price-earnings ratio but have come up with the following expression:,,P0 = 1 – b ,– ————,E1 R – (ROE x b),,Beginning with the constant dividend growth model, verify this result. What does this expression imply about the relationship between the dividend payout ratio, the required return on the stock, and the company’s ROE?,,5. Assume the company’s growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio?,,6. After discussing the stock value with the consultant, Genevieve and Carrington agree that they would like to increase the value of the company stock. Like many small business owners, they would like to retain control of the company, but they do not want to sell stock to outside investors. They also feel that the company’s debt is at a manageable level and do not want to borrow more money. How can they increase the price of the stock? Are there any conditions under which such an action would not increase the stock price? Explain.
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