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Munn Inc., was founded ten years ago by David and Sarah Munn. the company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Munn Inc., has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. the company is equally owned by David and Sarah. 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 discount 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 information about their main competitors in the table below.

Expert HVACs negative earnings per share were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $1.06. The ROE for Expert HVAC is based on net income excluding the write-off. Last year Munn Inc., had an EPS of $4.54 and paid a dividend to David and Sarah of $60,000 each. The company also had a ROE of 18%. The siblings believe that 15% is an appropriate return for the company.

1. Assuming the company continues its current growth rate, what is the value per share of the companys stock.

2. To verify their calculations, David and Sarah have hired Jimmy Buffett as a consultant. Jimmy was previously an equity analyst and covered the HVAC industry. Jimmy has examined the companys financial statements, as well as its competitors financials. Although Munn Inc., currently has a technological advantage, his research indicates that other companies are investigating method to improve efficiency. Given this, Jimmy believes that the companys technological advantage will last only for the next five years. After that, the companys growth will likely slow to the industry growth average. Additionally, Jimmy 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 stock price?

3. What is the industry average price-earnings ratio? What is the price-earnings ratio for Munn Inc.? Is this the relationship you would expect between the two ratios? Why?

\begin{tabular}{lrrrrr} & \multicolumn{2}{c}{ Munn lnc., Competitors } & & & \\ & EPS ($) & DPS ($) & Stock Price ($) & ROE (%) & R (%) \\ \hline Arctic Cooling Inc. & 0.81 & 0.20 & 14.18 & 10.00 & 10.00 \\ National Heating \& Cooling & 1.38 & 0.62 & 11.87 & 13.00 & 13.00 \\ Expert HVAC Corp. & -0.46 & 0.38 & 13.21 & 14.00 & 12.00 \\ \hline Industry Average & 0.58 & 0.40 & 13.09 & 12.33 & 11.67 \\ \hline \end{tabular}

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