Person C and Person GR are the founders and owners of the R Company. This company manufactures and installs heating, ventilation, and cooling units (HVAC) commercially. Both the owners have 50,000 shares of company’s stock as per the partnership deed. They wanted to sell their stocks and decided to value their holding in the company. R Company has earnings per share of $3.15 and the dividends of $45,000 each were paid to the owners of the company. Moreover, there is even return on equity (ROE) of 17% and the required rate of return is 14%. Characters in the case: R Company: The firm that wants to value their stocks Person C: Co-owner of Company R Person GR: Co-owner of Company R To discuss: On the expression for the price-earnings ratio that imply about the relationship between the required return, return on equity of the company, and dividend payout ratio. Introduction: A company’s market price per share to its earnings per share is termed as price earnings ratio . This ratio assists in stock selection. The rate of return refers to the loss or gain incurred on the investment made by the company. Return on equity (ROE) measures the profitability of the company by indicating profit generated from the money invested by the shareholders.

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Chapter 8, Problem 4M

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Case summary:

Person C and Person GR are the founders and owners of the R Company. This company manufactures and installs heating, ventilation, and cooling units (HVAC) commercially. Both the owners have 50,000 shares of company’s stock as per the partnership deed. They wanted to sell their stocks and decided to value their holding in the company.

R Company has earnings per share of $3.15 and the dividends of $45,000 each were paid to the owners of the company. Moreover, there is even return on equity (ROE) of 17% and the required rate of return is 14%.

Characters in the case:

R Company: The firm that wants to value their stocks

Person C: Co-owner of Company R

Person GR: Co-owner of Company R

To discuss: On the expression for the price-earnings ratio that imply about the relationship between the required return, return on equity of the company, and dividend payout ratio.

Introduction:

A company’s market price per share to its earnings per share is termed as price earnings ratio. This ratio assists in stock selection. The rate of return refers to the loss or gain incurred on the investment made by the company.

Return on equity (ROE) measures the profitability of the company by indicating profit generated from the money invested by the shareholders.

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Assuming that the required rate of return is determined by the CAPM, explain how you would usethe dividend growth model to estimate the pricefor Stock i. Indicate what data you would need,and give an example of a “reasonable” value foreach data input. How would this be differentif you used free cash flows as the basis for yourevaluation?