CHAPTER CASE STOCK VALUATION AT RAGAN, INC. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = D agan, Inc., . was founded nine years ago by Last year, Ragan, Inc., had an EPS of $4.85 brother and sister Carrington and Genevieve and paid a dividend to Carrington and Genevieve Ragan. The company manufactures and installs com- of $75,000 each. The company also had a return mercial heating, ventilation, and cooling (HVAC) units... on equity of 17 percent. The siblings believe that Ragan, Inc., has experienced rapid growth because 14 percent is an appropriate required return for the of a proprietary technology that increases the energy company. efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partner- ship agreement between the siblings gave each 50,000 shares of stock. In the event either wished to Ragan, Jnc. - Competitors sell stock, the shares first had to be offered to the Stock other at a discounted price. EPS Div. Price BOE Although neither sibling wants to sell, they have Arctic decided they should value their holdings in the com- Cooling, Inc. $.84 $.39 $17.83 16.00% 10.00% pany. To get started, they have gathered the following National Heating information about their main competitors: & Cooling 1.34 .65 19.23 14.00 13.00 Expert HVAC Expert HVAC Corporation's, negative earnings. Corp. -,55 43 18.14 15.00 12.00 per share were the result of an accounting write-off Industry last year. Without the write-off, earnings per share for Average $.54 $.49 $18.40 15.00 11.67 the company would have been $.54. W.UT Wavu wur. VVU. .veru 1.34 .65 19.23 14.00 k^ + - get started, they have gathered the following 237 bn about their main competitors: 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 $.54. VuvuY, JUU, National Heating & Cooling Expert HVAC Corp. Industry Average --.55 .43 18.14 15.00 12.00 $.54 $.49 $18.40 15.00 11.67 QUESTIONS 1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity ana- lyst and covered the HVAC industry. Josh has examined the company's financial statements, as well as those of its competitors. Although Ragan, Inc., currently has a technological advan-. tage, 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 five years. After that period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the re- quired return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate as- sumption, what is your estimate of the stock price