CHAPTER 7
STOCK VALUATION AT RAGAN
THERMAL SYSTEMS
1. The total dividends paid by the company were $150,000. Since there are 100,000 shares outstanding,
the total earnings for the company were:
Total earnings = 100,000($4.85) = $485,000
This means the payout ratio was:
g = ROE × b = .17(.69) = .1174, or 11.74%
The dividend per share paid this year was:
D0 = $75,000 / 50,000
D0 = $1.50
2. Since Expert HVAC had a write off which affected its earnings per share, we need to recalculate the
industry EPS. So, the industry EPS is:
Industry EPS = ($.84 + 1.34 + .54) / 3 = $.91
This means the industry growth rate is:
Industry g = .15(.4596) = .0689, or 6.89%
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:
D1 = $1.50(1.1174) = $1.68
D2 = $1.68(1.1174) = $1.87