CHAPTER CASE

Stock Valuation at Ragan, Inc.

Ragan, Inc., was founded nine years ago by brother and

sister Carrington and Genevieve Ragan. The company

manufactures and installs commercial heating, ventilation, and

cooling $($HVAC$)$ units. Ragan, Inc., has experienced rapid

growth because of a proprietary technology that increases the

energy efficiency of its units. The company is equally owned

by Carrington and Genevieve. 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 following information 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

$$1\mathrm{.}10.$

Last year, Ragan, Inc., had an EPS of $$3\mathrm{.}15$ and paid a

dividend to Carrington and Genevieve 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.

QUESTIONS

Assuming the company continues its current growth rate,

what is the value per share of the company's stock?

To verify their calculations, Carrington and Genevieve have

hired Josh Schlessman as a consultant. Josh was

previously an equity analyst 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 advantage, 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 required return used by

the company is too high. He believes the industry average

required return is more appropriate. Under this growth rate

assumption, what is your estimate of the stock price?