Wyntertate
PART 1 1. With regard to the bid price and the ask price on a…
PART 1
1. With regard to the bid price and the ask price on a Treasury bond (or a Treasury note), which one should be higher? The bid price or the ask price? Why? All Treasury notes and bonds are relatively liquid, but some are more liquid than others. Look at Figure 6.3 – U.S. Treasury Quotes (for 10th edition) [Figure 6.4 – U.S. Treasury Quotes (for 11th edition)] on the textbook Chapter 6 (page 189 for 10th edition; page 193 for 11th edition). Figure 6.3 lists various issues of U.S. Treasury notes and bonds. Which issues appear to be the most liquid? The least liquid? Explain. (related to Learning Outcome (LO) #1)
2. Federal Reserve can base on the inflation rate movement to change the interest rate. Explain the impact of inflation on the interest rate and then on the stock market. (related to LO #4)
3. Some high-tech companies, such as Google and Facebook, have created classified stocks to meet their own special needs. For instance, Google’s Class A stock (Symbol: GOOGL) has one vote per share and its Class C stock (Symbol: GOOG) has no vote per share; its Class B stock, which is not traded on the public markets and is retained by the firm’s insiders (such as founders and CEO), has 10 votes per share. Why are investors willing to buy such Class A or Class C stock with one vote or no vote per share, much less than 10 votes per share of Class B stock? Is it unfair or unethical for corporations to create classes of stock with unequal voting rights? (related to LO #7)
PART 2
Ragan, Inc., was founded 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 gathered the following information about their main competitors:
Ragan, Inc. – Competitors. EPS. Dividend. Stock Price. ROE. R
Arctic Cooling. $0.84. $0.39 $17.83. 16.00%. 10.00%
Inc. National Heating & Cooling. $1.34. $0.65. $19.23. 14.00%. 13.00%
Expert HVAC Corp. -$0.55 $0.43. $18.14. 15.00%. 12.00%
Industry Average. $0.54. $0.49. $18.40. 15.00%. 11.67%
Expert HVAC Corporation’s negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $0.54.
Last year, Ragan, Inc., had an EPS of $4.85 and paid a dividend to Carrington and Genevieve of $75,000 each. The company also had a return on equity (ROE) of 17%. The siblings believe that 14% is an appropriate required return (R) for the company.
1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock? (Hint: growth rate (g) = retention ratio × ROE; retention ratio was discussed in Chapter 3 of textbook. Use 4 decimals when calculating the growth rate (g).).
2. To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst and covered the HVAC industry. Josh has examined the company’s financial statements, as well as those of its competitors. Although Ragan, Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Josh 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, Josh believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate assumption, what is your estimate of the stock price?
(Use 4 decimals when calculating the industry growth average and the industry average required return.)
PLEASE BE DETAILED AND SHOW WORK FOR PART 2 !
THANK YOU SO MUCH FOR YOUR HELP
