CASE 2

Ryan International

In the world of skateboard attire, instinct and marketing savvy are prerequisites to success. Moogy Ellis had both. During 2021, his international skateboarding company, Ryan, rocketed to $900 million in sales after 10 years in business. His fashion line covered the skateboarders from head to toe with hats, shirts, pants, shorts, sweatshirts, socks, and shoes. In L.A., there was a Ryan shop every five or six blocks, each featuring a different color. Some shops showed the entire line in mauve, and others featured it in canary yellow.

Ryan had made it. The companys historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that Ryan could not keep up the pace. They warned that competition is fierce in the fad fashion industry and that the firm might encounter little or no growth in the future. They estimated that stockholders also should expect no growth in future dividends.

Contrary to the conservative securities analysts, Moogy Ellis feels that the company could maintain a constant annual growth rate in dividends per share of 10.5% in the future, or possibly 12% for the next 2 years and 10.5% thereafter. Ellis based his estimates on an established long-term expansion plan into European and Latin American markets. Venturing into these markets was expected to cause the risk of the firm, as measured by the beta on its stock, to increase immediately from 1.1 to 1.25.

In preparing the long-term financial plan, Ryans chief financial officer has assigned a junior financial analyst, Brad Harris, to evaluate the firms current stock price. He has asked Brad to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Moogy Ellis.

Mark has compiled these 2021 financial data to aid his analysis:

Data item		2021 value
Earnings per share (EPS)		$4.35
Price per share of common stock		$51.50
Book value of common stock equity		$60,000,000
Total common shares outstanding		3,000,000
Common stock dividend per share		$2.35
Data Points
Beta, b	Required Return, K
0	4.75%
.25	6.875%
.5	9%
.75	11.125%
1	13.25%
1.25	15.375%
1.5	17.5%

To Do

a. What is the firms current book value per share?

b. What is the firms current P/E ratio?

c. (1) What is the current required return for Ryan stock (use CAPM)?

(2) What will be the new required return for Ryan stock assuming that they expand into European and Latin American markets as planned (use CAPM)?

d. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the Ryan stock? (Note: use the new required return on the companys stock here)

e. (1) If Moogy Elliss predictions are correct, what will be the value per share of Ryans stock if the firm maintains a constant annual 10.5% growth rate in future dividends? (Note: Continue to use the new required return here.)

(2) If Moogy Elliss predictions are correct, what will be the value per share of Ryans stock if the firm maintains a constant annual 13% growth rate in dividends per share over the next 2 years and 10.5% thereafter? (Note: Use the new required return here.)

f. Compare the current (2021) price of the stock and the stock values found in parts a, d, and e. Discuss why these values may differ. Which valuation method do you believe most clearly represents the true value of the Ryan stock?