Stock Valuation at Ragan Engines

Question #1

We’ve been asked to find the value per share of Ragan Engine, Inc.’s stock assuming the company continues its current growth rate. In order to find this we will need to assess what we already know about the company:

• Earnings per share (EPS) = $5.08

• Number of shares = 300,000 (150,000 for each sibling)

• Required Return = 20%

• Return on Equity = 25%

• Dividend per share = 640,000 / 300,000 = $2.13

First, you’ll want to find the Net Income by calculating the following equation:

Net Income = EPS * the Number of share

= $5.08 * 300,000

= $1,524,000

Now that we have the net income, we can use the net income to find the annual growth rate of dividends. To do so we can use the calculation g= RR * ROE where RR is the firm’s retention ration and ROE is the firm’s return on equity.

g = RR * ROE

= 1 – (640,000 / 1,524,000) * 0.25

= ( 1 - 0.42 ) * 0.25

= 0.58 * 0.25

= 0.145 = 14.5%

Once you’ve found the annual growth rate, you’re going to have enough information to find the price of the share of stock with constant growth. To do so, we will use the following equation:

P0 = Div / R – g

= D (1 + g ) / R – g

= 2.13 (1 + 0.145) / 0.20 – 0.145

= 2.43885 / 0.055

= $44.34

Therefore, the value per share of Ragan Engine, Inc.’s stock assuming the company continues its current growth rate is $44.34.