When it comes to voting in elections, differentiate U.S. political democracy and U.S. corporate democracy.

Ragan, Inc., was formed nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price.

 Although neither sibling wants to sell, they have decided they should value their holdings in the company. To get started, they have combined the information about their main competitors in the table below.

 Expert HVAC Corporation’s negative earnings per share were the result of an accounting write-off last year. Without the write-off, earnings per share for the company would have been $1.10. The ROE for Expert HVAC is based on net income excluding the writeoff.

 In the previous year, Ragan, Inc., had an EPS of$3.15 and paid a dividend to Carrington and Genevieve of $45,000 each. The company also had a return on equity of 17%. The siblings believe that 14% is an appropriate required return for the company.

QUESTION

After discussing the stock value with Josh, Carrington and Genevieve agree that they would like to increase the value of the company stock. Similar to 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?

Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically bigger?

Assume you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.5%. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

Ragan, Inc., was formed nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price.

 Although neither sibling wants to sell, they have decided they should value their holdings in the company. To get started, they have combined the information about their main competitors in the table below.

 Expert HVAC Corporation’s negative earnings per share were the result of an accounting write-off last year. Without the write-off, earnings per share for the company would have been $1.10. The ROE for Expert HVAC is based on net income excluding the writeoff.

 In the previous year, Ragan, Inc., had an EPS of$3.15 and paid a dividend to Carrington and Genevieve of $45,000 each. The company also had a return on equity of 17%. The siblings believe that 14% is an appropriate required return for the company.

QUESTION

Suppose the company’s growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio?

Tell Me Why Co. is assumed to maintain a constant 3.9% growth rate in its dividends indefinitely. If the company has a dividend yield of 5.9%, what is the required return on the company’s stock?