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Orange Coast College *
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Course
TBUS350
Subject
Industrial Engineering
Date
Dec 6, 2023
Type
Pages
4
Uploaded by mimi192
Chapter 7 Homework - Part II
Earnings per
share (EPS)
Dividends per
share (DPS)
Stock price
Return on Equity
(ROE)
Required Return
Competitor A
$1.30
$0.16
$25.34
8.50%
10.00%
Competitor B
$1.95
$0.23
$29.85
10.50%
13.00%
Competitor C
($0.37)
$0.14
$22.13
9.78%
12.00%
Industry Average
$0.96
$0.18
$25.77
9.59%
11.67%
Total points: 5
Happy, Inc. was founded 9 years ago by siblings Brandon and Rachael Happy. The company manufactures and
installs commercial heating, ventilation, and cooling (HVAC) units. Happy, Inc. experienced rapid growth because of
a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Brandon
and Rachael.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 had decided they should value their holdings in the company. To get started, they
have gathered the following information about their main competitors:
Competitor C'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.
Question 1
Question 2
Complete the boxes in yellow highlighted area to answer the two questions.
Here are some basic facts to get you started:
Shares owned by
each sibling
50,000
Happy EPS
$3.15
Dividend to each
sibling
$45,000
Last year, Happy, Inc. had an EPS of $3.15 and paid a dividend to Brandon and Rachael of $45,000 each. The
company also had a return on equity of 17 percent. The siblings believe that 14 percent is an appropriate required
return for the company.
Assuming the company continues its current growth rate, what is the value per share of company's stock?
To verify their calculations, Brandon and Rachael hired ABC Consultants, an equity analysts that covers the HVAC
industry. ABC has examined the company's financial statements as well as those of its competitors. Although Happy,
Inc. currently has technological advantage, their research indicates that other companies are investigating methods
to improve efficiency. Given this, ABC believes that the company's technological advantage will last only for the next
five years. After that period, the company's growth will likely slow to the industry growth average. Additionally, ABC
believes that the required return used by the company is too high. ABC believes the industry average required return
is more approrpriate. Under this growth rate assumption, what is your estimate of the stock price?
Happy ROE
17%
Happy required
return
14%
Complete the following output areas to answer the questions
Total dividends
Total earnings
hint: EPS x shares outstanding
Retention ratio
this is the percentage of earnings not paid out in dividends
Growth rate
hint: retention ratio x ROE
Current dividend
per share
Dividend per
share next year
Question 1
Answer:
Value per share
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Industry EPS
hint: for competitor C, use the expert EPS w/o write-off
Industry payout
ratio
Industry retention
ratio
Industry growth
rate
Year
Dividends/share
hint: use the following growth rates to fill in the shaded area
1
Company growth rate
2
Company growth rate
3
Company growth rate
4
Company growth rate
5
Company growth rate
6
INDUSTRY growth rate
Stock value in
Year 5
Question 2
Answer:
Stock price today