CASE 1 (65 points) Ramirez S.L. was founded nine years ago by brother and sister loan and Maribel Ramirez. The company manufactures and installs commercial heating, ventilation, and cooling units. Ramirez S.L. has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally owned by Joan and Maribel. 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 information about their main competitors in the table below. Last year, Ramirez S.L. had an EPS of 63.15 and paid a dividend to Joan and Maribel of 45,000 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 Ramirez S.L. Competitors EPS DPS Stock Price ROE R Arctic Cooling S.L. National Heating & Cooling Expert Ventilation S.L. Industry Average 1.30 1.95 1.10 1.45 0.16 0.23 0.14 0.18 25.34 29.85 22.13 25.77 8.50% 10.50 9.78 9.59% 10.00% 13.00 12.00 11.67% To verify their calculations, Joan and Maribel have hired Marc Puig as a consultant. Marc was previously an equity analyst and covered this industry. Marc has examined the company's financial statements, as well as examining its competitors' financials. Although Ramirez S.L. currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Marc 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, Marc believes that the required return used by the company is too high. He believes the industry average required return is more appropriate. 1. What is your estimate of the stock price, based on Marc's assumption regarding the growth rate? Hint: use non-constant growth model, implying that after the next five years the company's growth rate will slow down to the industry growth rate. (15 points) Assume the company's growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio? (5 points) After discussing the stock value with Marc, Joan and Maribel agree that they would like to increase the value of the company stock. Like many small business owners, they want to retain control of the company, so they do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. 3. How can they increase the price of the stock? (10 points)
