Assignment
Ragan, Inc., was founded nine years ago by brother and sister John and Mary 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 John and Mary. 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: earnings per share, DPS: dividends per share, ROE: return on equity, R: cost of capital)
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Ragan, Inc. - Competitors
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EPS
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DIV
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Stock Price
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ROE
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R
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Arctic Cooling, Inc.
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$ 0.84
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$ 0.39
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$ 17.83
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16%
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10%
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National Heating & Cooling
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$ 1.34
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$ 0.65
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$ 19.23
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14%
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13%
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Expert HVAC Corp.
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$ (0.55)
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$ 0.43
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$ 18.14
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15%
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12%
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Industry average
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$ 0.54
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$ 0.49
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$ 18.40
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15%
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11.67%
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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 $0.54.
Last year, Ragan, Inc., had an EPS of $4.85 and paid a dividend to John and Mary of $75,000 each. The company also had a return on equity of 17%. The siblings believe that 14% is an appropriate required return for the company.
Assuming the company continues its current growth rate, what is the value per share of the company's stock?
To verify their calculations, John and Mary have hired Josh 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 examining 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 5 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?