to verify the calculation, carrigton and genevieve have hired josh schlessman as
ID: 2704952 • Letter: T
Question
to verify the calculation, carrigton and genevieve have hired josh schlessman as a consultan. josh was preeviously an equity analyst and converd the HVAC industry. josh has examining its competitors. although ragan, inc, currently has a technologiocal advantage, his research indicates that other comapnies are investiagting methods to improve efficiency. given this josh believes that comapny's technological advantage will last only for the next five years. after that period, the comapny's growth will likely slow to the industry growth average. additionally, josh believes that the required return used by the comapny is too high. he belives the industry average required return is more appropriate. under thios growth rate assumption, whta is your estimate of the stock price?
Explanation / Answer
The actual stock price of the company must be lower than what it is trading at right now.
Firstly because since the required rate of return for the company is much higher, it would discount the cash flow by a higher factor thereby reducing the intrinsic value of the firm.
Second the estimated grwoth rate will be lower as the technological edge is likely to last for another 5 years. In other words, the two stage growth rate (in case you are using DCF) and/or the terminal growth rate will be lower now knowing that other firms are cathcing up with the technology. This now means that the terminal flows and the later years flows(yr 5 onwards) are likely to be lower resulting in lower free cash flows to firm which again leading to a lower intrinsic value of the firm.
Considering both the above factors i would say the the stock is over valued as of now and is expected to correct in the coming years.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.