Answer the following questions. The upper word limit is 700 English words. Please cite references where necessary. Do not type the questions again in your write-up.
The directors of Valeo are considering horizontal expansion of the company by acquiring another thermal systems company that manufactures and installs commercial heating, ventilation and cooling units. After investigating several possible companies, the directors consider that Ragan Thermal Systems is a possibility.
Ragan Thermal Systems is a privately owned company and equally owned by a couple. Ragan has experienced rapid growth in the recent few years. The couple owns 50,000 shares each.
The directors have asked an analyst to determine the value per share of Ragan stock. The analyst has gathered the following information about some of Ragan’s competitors that publicly traded:
What is the industry simple average price-earnings (PE) ratio? Based on the industry’s benchmark PE, what is Ragan’s stock price if the firm’s reported earnings = $320,000?
Comment on the following statement: “Caution is warranted when using PE ratio to value stocks.” Apart from using PE ratio, suggest another way of valuing the stock price based on the information given (no calculations required). Discuss the assumptions and the limitations of this model.
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