CHAPTER 6 C-1
CHAPTER 6
STOCK VALUATION AT RAGAN
THERMAL SYSTEMS
1. The total dividends paid by the company were $390,000. Since there are 250,000 shares outstanding,
the total earnings for the company were:
Total earnings = 250,000($3.65) = $912,500
This means the payout ratio was:
Now we can value the company using the entire dividend payment. The total value of the company’s
equity under these assumptions is:
So, the value per share is:
Value per share = $63.89
2. Since Nautilus Marine Engines had a write off which affected its earnings per share, we need to
recalculate the industry EPS. So, the industry EPS is:
Industry EPS = ($1.24 + 1.55 + 1.93)/3 = $1.57
Using this industry EPS, the industry payout ratio is:
CHAPTER 6 C-2
This means the industry growth rate is:
Industry g = .1250(.6758) = .0845, or 8.45%
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:
The total value of the stock in Year 5 with the industry required return will be:
3. Using the revised industry EPS, the industry PE ratio is:
Industry PE = $22.85/$1.57 = 14.52
Using the original stock price assumption, Ragan’s PE ratio is:
Using the revised assumptions, Ragan’s PE = $29.37/$3.65 = 8.05
4. Again, we will assume the results in Question 2 are correct. The growth rate of the company we
calculated in this question was the industry growth rate of 8.45 percent. So the growth rate is:
g = ROE × b
If we assume the payout ratio remains constant, the ROE is:
ROE = .1475, or 14.75%
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5. The most obvious solution is to retain more of the company’s earnings and invest in profitable
opportunities. This strategy will not work if the return on the company’s investment is lower than the