In: Finance
EPS | DPS | STOCK PRICE | ROE | ROA | |
Blue Ribband Motors Corp. | $ 1.24 | $ 0.39 | $ 20.10 | 11.00% | 14.00% |
Bon Voyage Marine, Inc. | 1.55 | 0.47 | 16.85 | 14.00% | 17.00% |
Nautilus Marine Engines | (0.25) | 0.67 | 31.60 | N/A | 13.00% |
Industry average | 0.85 | 0.51 | 22.85 | 12.50% | 14.67% |
The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 125,000 shares of stock. Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this Dan has gathered the following info about some public competitors. Nautilus Marine Engines (EPS) was the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $1.93. Last year, Ragan had an EPS of $3.65 and paid a dividend to Carrigton and Genevieve for $195,000 each. The company also had a ROE of 18%. Larissa teslls Dan that a required return for Ragan of 13% is appropriate. |
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a. Calculate the industry's average growth rate. You may need to adjust for nonrecurring events that would impact the industry information |
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Average Industry Growth Rate = | |||||||||||
b. Calculate the Dividends for Ragan for each of the next 6 years | |||||||||||
c. What is the value of the stock today and what is the value per share? | |||||||||||
After adjusting for nonrecurring events (Nautilus Marine Engines) | ||
a. Av. Industry growth rate= Av.ROE*Retention Ratio | ||
ie. 12.50%*((1.57-0.51)/1.57) | ||
8.44% |
b. Calculation of Dividends for Ragan for each of the next 6 years | ||
Ragan's Year 0 DPS= $ 195000/125000 shs.= | 1.56 | |
Ragan's EPS= | 3.65 | |
Retention Ratio=(3.65-1.56)/3.65= | 57.26% | |
Ragan's growth rate=ROE*RR= | ||
18%*57.26%= | 10.31% |
Ragan's Dividends for the next 6 yrs. | |||
D1 | 3.65*(1+10.31%)^1= | 4.0263 | |
D2 | 3.65*(1+10.31%)^2= | 4.4414 | |
D3 | 3.65*(1+10.31%)^3= | 4.8993 | |
D4 | 3.65*(1+10.31%)^4= | 5.4045 | |
D5 | 3.65*(1+10.31%)^5= | 5.9617 | |
D6 | 3.65*(1+10.31%)^6= | 6.5763 | (as per this growth rate) |
If the current growth rate of Ragan continues, | |
then value per share will be | |
3.65*(1.1031)/(18%-10.31%)= | 52.36 |
C. Stock price as per Dan's assumptions--g=8.44% (Ind. Av. g )after Yr.5 | PV F at 13% | PV at 13% | ||
D1 | 3.65*(1+10.31%)^1= | 4.0263 | 0.884956 | 3.563111 |
D2 | 3.65*(1+10.31%)^2= | 4.4414 | 0.783147 | 3.47829 |
D3 | 3.65*(1+10.31%)^3= | 4.8993 | 0.69305 | 3.395488 |
D4 | 3.65*(1+10.31%)^4= | 5.4045 | 0.613319 | 3.314657 |
D5 | 3.65*(1+10.31%)^5= | 5.9617 | 0.54276 | 3.235751 |
Value at end Yr.5(5.9617*(1.0844)/(13%-0.0844)= | 141.773 | 0.54276 | 76.94893 | |
Stock Value at Year 0 | 93.93622 | |||
Value per share= | ie. | 93.94 |