You have been hired to verify the share price valuation, and have been given information on Ecorenewable Energy and its three closest competitors. You believe that although Ecorenewable Energy has a technological advantage from the point absorber buoy, your research indicates that the firm’s competitors are investigating a new technology that uses overtopping devices, which use wave velocity to power low-head turbines either on- or offshore. You expect Ecorenewable Energy’s technological advantage will last for around five years, after which the company’s growth rate will converge to the industry average growth rate. You also believe that the required return of 20 per cent is too high and that the industry average discount rate is more appropriate. With these assumptions, is your share price estimate higher or lower?

Ecorenewable Energy is a renewable wave energy firm that was established in 2016 by two finance graduates. The company manufactures and installs wave energy converters through a point absorber buoy that floats on the surface of the water. Ecorenewable Energy has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its systems. The company is owned equally by the two graduates, with each person holding 50,000 shares for a total of 100,000 shares in the company. In the event either wished to sell their shares, they first had to be offered to the other at a discounted price.
Both shareholders have decided they should value their holdings in the company for financial planning purposes. To accomplish this, they have gathered the following information about their main competitors:
Ecorenewable Energy plc Competitors EPS (€) DPS (€) Share Price (€) ROE (%) R (%)
Surface Attenuator Systems 0.82 0.16 15.19 11 10 Wave Surge Oscillators plc 1.32 0.52 12.49 14 13 Water Column Oscillations SA −0.47 0.54 48.60 14 12 Industry average 0.56 0.41 25.43 13 11.67 Water Column Oscillations SA’s negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been €2.34.
Last year, Ecorenewable Energy had an EPS of €4.32 and paid a total dividend of €108,000, shared equally between the two shareholders. The company had a return on equity of 25 per cent. This is more than the 20 per cent required return of the shareholders.