B C D E G H CHAPTER CASE le: Stock Valuation at Ragan, Inc. pter 7 an, Inc. Dagan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The Ragan, Inc. - Competitors Compute the following: company manufactures and installs commercial heat- Stock Total Earnings: Show work: EPS Div. Price ROE R ing, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary Arctic Cooling, $1.30 $.16 $25.34 8.50% 10.00% technology that increases the energy efficiency of its Inc. units. The company is equally owned by Carrington National 1.95 .23 29.85 10.50 13.00 and Genevieve. The original partnership agreement Heating & Cooling Payout Ratio: Show work: between the siblings gave each 50,000 shares of Expert HVAC .37 .14 22.13 12.00 stock. In the event either wished to sell stock, the 9.78 Corp. shares first had to be offered to the other at a dis- Industry $.96 $.18 $25.77 9.59% 11.67 counted price. average Although neither sibling wants to sell, they have de- cided they should value their holdings in the company. Retention Ratio Show work: Expert HVAC Corporation's negative earnings per To get started, they have gathered the following infor- share were the result of an accounting write-off last year. mation about their main competitors: Without the write-off, earnings per share for the com- pany would have been $1.10. Last year, Ragan, Inc., had an EPS of $3.15 and paid a dividend to Carrington and Genevieve of $45,000 Growth Rate: Show work: 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. Dividend Per Share: Show work: QUESTIONS 1. Assuming the company continues its current investigating methods to improve efficiency. growth rate, what is the value per share of the Given this, Josh believes that the company's company's stock? technological advantage will last only for the Stock Price: Show work: 2. To verify their calculations, Carrington and Gene- next five years. After that period, the company's vieve have hired Josh Schlessman as a consultant. growth will likely slow to the industry growth av- Josh was previously an equity analyst and cov- erage. Additionally, Josh believes that the re- ered the HVAC industry. Josh has examined the quired return used by the company is too high. company's financial statements, as well as those He believes the industry average required re- of its competitors. Although Ragan, Inc., cur- turn is more appropriate. Under this growth rate rently has a technological advantage, his re- assumption, what is your estimate of the stock search indicates that other companies are price