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Question No 3


Question No 3. (Marks 4) Sahara Inc., was founded nine years ago by brother and sister Fatema and Muhanad Al Balushi. The company manufactures and installs commercial heating, ventilation, and cooling units. Sahara Inc. has experience rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Fatema and Muhanad. 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: EPS DPS Earnings per share Dividend per share Arctic Inc. 50.x2 $0.16 Heating & Cooling Inc. $1.32 $0.52 Breese Inc. S-0.47 $0.40 Industry Average 50.56 $0.36 Stock price ROE R Return Required equity SI5.19 11% 10% $12.49 $11.47 513.05 139 Expert Breese Inc. negative earnings per share were the result of an accounting wright-off last year. Without the wright- off, carnings per share for the company would have been $0.97. Last year, Sahara Inc., had an EPS of $4.32 and paid dividend to Fatema and Muhanad of $54,000 each. The company also had a return on equity of 25%. The siblings believe that 20% is an appropriate required return for the company: 1. Assuming Sahara Inc., use the Zero Growth model, what is the value of share of stock today (P.)? Compare with stock prices for other companies and the industry average and give recommendations on changing dividend policy. 2. To verify the calculations, Fatema and Muhanad have hired Josh Smith as a consultant. Josh has examined the company's financial statements, as well as examining its competitors. Although Sahara Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency 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 assumption, what is your estimate of Sahara stock price today? Do you agree with Josh's analysis? 

What are the advantages of each of below methods? Which method are you likely to accept?

- payback period

- average rate of return on initial investment

- net present value (NPV)

Option 1

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Option 2

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