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CHAPTER 9
STOCK VALUATION AT RAGAN ENGINES
1. The total dividends paid by the company were $640,000. Since there are 300,000 shares outstanding, the
total earnings for the company were:
Total earnings = 300,000($5.35) = $1,605,000
This means the payout ratio was:
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 = ($1.19 + 1.26 + 2.07)/3 = $1.51
Using this industry EPS, the industry payout ratio is:
Industry payout ratio = $.44/$1.51 = .2898, or 28.98%
3. Using the revised industry EPS, the industry PE ratio is:
Industry PE = $18.08/$1.51 = 12.00
4. Here, we must make an assumption. We have two estimates of the required return. Since we are assuming
the growth rate follows the growth rate assumption in Question 2, we will use the industry average required
return assumed in that question as well. As a cash cow, the total earnings of the company which would be
paid out as a dividend are:
5. 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 7.81 percent. Since the growth rate is:
6. The most obvious solution is to retain more of the company’s earnings and invest in profitable opportunities.
