Company Valuation

EPS

DPS

Stock Price

ROE

Return

AC

$$1\mathrm{.}30$

$$\mathrm{.}16$

$$25\mathrm{.}34$

$8\mathrm{.}50\%$

$10\mathrm{.}00\%$

NHC

$1\mathrm{.}95$

$\mathrm{.}23$

$29\mathrm{.}85$

$10\mathrm{.}50$

$13\mathrm{.}00$

EVAC

$0\mathrm{.}37$

$\mathrm{.}14$

$22\mathrm{.}13$

$9\mathrm{.}78$

$12\mathrm{.}00$

Industry Average

$ $0\mathrm{.}96$

$$0\mathrm{.}18$

$$25\mathrm{.}77$

$9\mathrm{.}59\%$

$11\mathrm{.}67\%$

$1-$ Assuming the company continues its current growth rate, what is the value per share of the company$$s stock?

Investors have hired a consultant to verify their calculations. The consultant is a former equity analyst who has expertise in the HVAC industry. He has thoroughly examined the financial statements of the company and those of its competitors. Although the company currently enjoys a technological advantage, the consultant's research indicates that other companies are also exploring ways to improve efficiency. Therefore, he believes that the company's technological advantage will last for only the next five years. After that, the company's growth will likely slow down to the industry's average growth rate. Moreover, the consultant thinks that the required return used by the company is too high and that the industry's average required return is more appropriate. Based on this growth rate assumption, what is your estimate of the stock price?

$2-$ What is the average price$-$earnings ratio for the industry and how does it compare to the company's price$-$earnings ratio? Is this relationship expected?

$3-$ The company's investors are struggling to comprehend the price$-$earnings ratio. They have devised the following equation to help them:

Verify this result using the constant dividend growth model and explain its implications for the dividend payout ratio, stock$$s required return and company$$s ROE.

$4-$ Assuming the company's growth rate slows to the industry average in five years, what future return on equity does this imply if the payout ratio remains constant?

$5-$ After discussing the stock value with the consultant, the investors agreed 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, so 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?