Calculate average price-earnings ratio, Finance Basics

Regan Inc., was founded nine years ago by brother and sister Carrington and Genevieve Regan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Regan, Inc., has experienced a rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50.000 shares of stock; the shared first had to be offered to the other at a discounted price.

Although neither sibling wants to sell, they have decided they should value their holdings in the company. To get started, they have gathered the information about their main competitors in the table below.

Ragan, Inc., competitors

 

EPS

DPS

Stock price

ROE

R

Arctic cooling, Inc.

$ 1.30

$ .15

$25.34

9.00%

10.00%

National heating and cooling

$ 1.95

$ .22

$29.85

11.00%

13.00%

Expert HVAC corp.

(.37) value is in minus

$ .12

$ 22.13

10.00%

12.00%

The Industry Average

$ .96

$ .16

$ 25.77

10.00%

11.67%

Questions:

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. Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst and covered the HVAS industry. Josh has examined the company's financial statement, as will as examining its competitors. Although Regan Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Josh believes that the company's technological advantage will last only for the next five years. After that period. The company's growth will likely slow to the industry growth average. Additionally Josh believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth assumption, what is your estimate of the stock price?

3-  What is the industry average price-earnings ratio?What is the price-earning ration for Reagan Inc.,? Is this the relationship you would expect between the two ratios? Why?

4-  Carrington and Genevieve are unsure of how to interpret the price-earnings ratio. After some head scratching. They have come up with the following expression for the price-earning ratio:

 P0/E1 = 1-b / R -(ROE * b)

Beginning with the 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 Josh. Carrington and Genevieve agree that they would like to increase the value of the company stock. Like many small business owners, they want 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 this strategy would not increase the stock price?

Posted Date: 3/7/2013 4:39:03 AM | Location : United States







Related Discussions:- Calculate average price-earnings ratio, Assignment Help, Ask Question on Calculate average price-earnings ratio, Get Answer, Expert's Help, Calculate average price-earnings ratio Discussions

Write discussion on Calculate average price-earnings ratio
Your posts are moderated
Related Questions

Forms of Business Organizations The term business is wide in meaning. It includes all human activities made for the sake of earning profits through the process of production of

Tax Differential Theory Advanced via Lichtenberger and Ramaswamy in 1979.They argued that tax rate on dividends is higher quite than tax rate on capital gains. Thus, a firm th

What are the Features of Stock Exchange The key features of stock exchange are as below: (1) Organised Market: Stock Exchange is an organized market. Each stock exchang

Percentage of Sales Method A) Express the various balance sheet items varying along with sales as percentage of sales as assume for year 2002 stock and net fixed assets amoun

Jobbers or Speculators - Stock Market 1. This is a dealer who that trades in securities in his own right like a principal. 2. He can set prices and make active the market w

Example of Sales Method The balance sheet of XYZ Ltd as on date 31st December 2002 is as following:          Net fixed asset Current assets   F

Competitors and General Public - Measuring Business Performance Competitors These are interested in the company's presentation from the market share point of view and wi

how can I get?

For any company that is quoted on the London Stock Market, you are required to write a report to existing shareholders on any TWO of the following issues. Each answer carries equal