Stock Valuation at Ragan Inc agan Inc was founded nine years

Stock Valuation at Ragan, Inc. agan, 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 Stock EPS DIv. Price ROE $.84 1.34 65 19.23 14.00 13.00 Arctic Cooling, $.39 $17.83 16.00% 10.00% Inc. National Heating & Coolin Expert HVAC 55 43 18.14 15.00 12.00 Corp. Industry $.54 $.49 $18.40 15.00 11.67 averag Expert HVAC Corporation\'s negative earnings per share were the result of an accounting write-off last year. Without the write-off, earnings per share for the company would have been $.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 of 17 percent. The siblings believe that 14 percent is an appropriate required return for the company QUESTIONS 1. Assuming the company continues its current growth rate, what is the value per share of the company\'s stock? 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?

Solution

Q1

The total dividend paid by company=$150000

Total shares= 100000

Total earnings= $4.85*100000= $485000

Payout Ratio=$150000/$485000= .31

Retention Ratio= 1-.31= .69

The company growth rate, g= ROE*b= .17 *.69= .1173

Dividend per share D0= $75000/50000= $1.5

Stock Price P0= D1/R-g

P0= $1.5(1.21)/.14-.1173

P0= $79.95

Q2

Industry EPS= $.84+$1.34+$.54/3= .91

Industry Payout ratio= $.49/.91= $.54

Industry retention ratio= 1-$.54= $.46

Industry growth rate, g= .46*.15= .069

The dividends for next six years will be:

D1=1.5 * 1.1173= 1.675

D2=1.675* 1.1173=1.871

D3=1.871*1.1173= 2.091

D4=2.091*1.1173=2.336

D5=2.336*1.1173=2.610

D6=2.610*1.1173= 2.916

Stock value in year 5= 2.916/(.1167-.069)= $61.13