Question

How would calculate these questions? With it being on a word document not on excel.

w 5 year di struct a table We stock price at Y in the perpetual growth a rale nel Grup to find out she cock price in ith price ralio vale divided by the tan stock price. Suppo to . Assume that a perpetual growth rate of 5 percent begins 11 years interpolate herween the high growth rate and perpetual growth rate shows the dividend growth rate and dividend each year. What is the What is the stock price today? How sensitive is the current stock price to changes in the perpetual curent stock price against the perpetual growth rate in 11 years to find Instead of applying the constant dividend growth model to find Future, analysts will often combine the dividend discount method with often with the PE ratio. Remember that the PE ratio is the price per shared in per share. So, if we know what the PE ratio is, we can solve for the su we also have the following information about Boeing: 30% Payout ratio PE ratio at constant growth rate petual growth rates e of the dividens using the PE ratio the stock reaches the E ratio in 11 years c. Use the PE ratio to calculate the stock price when Boeing reaches a perpetua dividends Now find the value of the stock today by finding the present value during the supernormal growth rate and the price you calculated using the PE d. How sensitive is the current stock price to changes in PE ratio when the perpetual growth rate! Graph the current stock price against the PE ratio in find out. Mini Case STOCK VALUATION AT RAGAN ENGINES Larissa has been talking with the company's directors about the future of East Coast Yache To this point, the company has used outside suppliers for various key components of the com pany's yachts, including engines. Larissa has decided that East Coast Yachts should conside the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its sur chain and get more control over engine features. After investigating several possible companies Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan's value. Ragan Engines, Inc., was founded nine years ago by a brother and sister-Carrington and Genevieve Ragan--and has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the fuel efficiency its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave me 150,000 shares of stock,

Answer 1

Without Excel, the only problem is going to be in time value of money calculations (present value, rate, annuity PV etc.). For this, you will have to use the tables. So, formulate your calculations in terms of:

1. PV / FV of discrete future values

2. PV / FV of annuities (for e.g. during the constant dividend growth period)

Then you can look up for the corresponding multiplication factors in the ready-made tables of Present value of future cash flows or present value of annuities at the given rate and the number of periods.

The rest of the calculations can be done using any basic calculator.

Alternate 2: If you have access to a financial calculator while solving the question you can use that as well for TVM calculations.

Alternate 3: If you can access Excel, there is also a way of linking of data & graphs dynamically between Word & Excel (After copying the data, use paste special command in word to Embed/Link) you can also use Insert menu->object for these.

Here is question wise explanation:

Q 1	ROE	21%
	R (Required return)	18%
	EPS	5.35
	DPS(D0 = Total dividend / shares)	2.13	(=320000*2/150000*2)
	Retention ratio= (1-DPS)/EPS	60.12%
	growth rate (g= Retention ratio * ROE)	12.63%
	Next expected dividend D1= D0 * g	2.40
	Expected share price= (D1/(R-g))	44.71

Q2

The price of stock in this situation can be seen as sum of two values: First is the PV of dividends for 5 years at respective rates and another is the PV of horizon value of expected stock price after 5 years. Mathematically it can be written as: $gf1AOSn5Zzv0AAAAABJRU5ErkJggg==$

	For five years, it will continue to grow at rate calculated in part 1 which is 12.63%
	The present value of dividends of next 5 years
	This can be written as
	D0 * ( (1+12.63%)/(1+18%) + (1+12.63%)^2/(1+18%)^2 +…+(1+12.63%)^2/(1+18%)^5)
	0.954	The series inside the brackets is a GP with starting term & common ratio of 0.954 which sums to
		=2.13*(0.954+0.954^2+...+0.954^5)
		9.28

This is one part of the current price, other part is the present value of stock price after 5 years which is calculated as shown below:
growth rate after 5 years= industry growth rate= industry retention ratio * industry ROE
Industry EPS avg= (1.09 + 1.26 + 2.07)/3	1.473
So industry growth rate=	7.71%
At the end of 5 years , the value of share can be found using constant growth model as
2.13*(1+7.71%)*(1+12.63%)^5/(15%-7.71%)	=57.04
Now we discount it to the present value using current required return R= 21%
=57.04 / (1+21%)^5	=21.99
	So current stock price = sum of above 2 parts
	31.273

Ques 3

P/E ratio = Price / EPS
	EPS	Stock price	P/E ratio
Blue	1.09	16.32	14.97
Bon	1.26	13.94	11.06
Nautilus	2.07	23.97	11.58
Regan (using constant growth model)	5.35	44.71	8.36
Regan (using non constant growth model)	5.35	31.273	5.85

Ques 4

For this just take g=0 instead of 7.71% in the second part of question 2. This will give the horizon value after 5 years= 9.92. So stock price will become 9.28+9.92 = 19.2 (if growth rate after 5 years=0)

The difference between the actual price calculated in part 2 (=31.273) and the 19.2 is nothing but the value attributable to growth opportunities which is 31.273-19.2 = 12.069