2. Carrington and Genevieve are unsure how to interpret the priceearnings ratio. After some head scratching theyve come up with the following expression for the priceearnings ratio. Beginning with the constant 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 companys ROE?

3. Assume the companys growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio?

4. 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 busi- ness 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 companys debt is at a manage- able 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?

were the result of an accounting write-off last year. Without MINICASE Stock Valuation at Ragan, Inc. Ragan, Inc., was founded nine years ago by brother and sis started, they have gathered the information about their main ter Carrington and Genevieve Ragan. The company man competitors in the table below. ufactures and installs commercial heating, ventilation, and Expert HVAC Corporation's negative earnings per share cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology that increases the the write-off, earnings per share for the company would have energy efficiency of its units. The company is equally owned been $1.10. The ROE for Expert HVAC is based on net in. by Carrington and Genevieve. The original partnership agree come excluding the write-off. ment between the siblings gave each 50,000 shares of stock. Last year, Ragan, Inc., had an EPS of $3.15 and paid a In the event either wished to sell stock, the shares first had to dividend to Carrington and Genevieve of $45,000 each. The be offered to the other at a discounted price. company also had a return on equity of 17 percent. The sib. Although neither sibling wants to sell, they have decided lings believe that 14 percent is an appropriate required retum they should value their holdings in the company. To get for the company. Arctic Cooling, Inc. National Heating & Cooling Expert HVAC Corp. Industry Average Ragan, Inc., Competitors EPS DPS Stock Price $1.30 $.16 $25.34 1.95 23 29.85 -.37 .14 22.13 $.96 $.18 $25.77 ROE 8.50% 10.50 9.78 9.59% R 10.00% 13.00 12.00 11.67%