QUESTION VALUATION OF SHARES

Ragan Thermal systems Ltd was founded nine years ago by brother and sister Carrington and Jenny Ragan. The company manufactures and installs commercial heating, ventilation and cooling systems. Ragan has experienced rapid growth because of proprietary technology that increases the energy efficiency of its systems. The company is owned equally by Carrington and Jenny. The original agreement between the siblings gave each 50,000 shares. In the event that either wishes to sell the shares, they first have to be offered to the other at a discounted price. Although neither sibling wants to sell any shares at present, they have decided they should value their holdings in the company for financial planning purposes. To accomplish this, they have gathered the following information about their main competitors.

	EPS(cents)	DPS(cents)	Share Price($)	ROE(%)	Required rate (%)
Artic cooling	0.82	0.16	15.19	11	10
National H&C	1.32	0.52	12.49	14	13
Expert cooling	-0.47	0.54	48.60	14	12
Industry average	0.56	0.42	25.43	13	11.25

Last year, Ragan had an EPS of $4.32 and paid a dividend to Carrington and Jenny of $ 54,000 each. The company also had a return on equity of 25%. The siblings believe a required rate of return for the company of 20% is appropriate. Required: 1. Assuming the company continues its current growth rate (growth rate should be inferred from the data given) into the infinite period, what is the share price of the company?

2. To verify their calculations, Carrington and Jenny have hired Josh Jobby, a consultant. Josh was previously an equity analyst, and he has covered the Heating and Cooling Industry. Josh has examined the companys financial statements as well as those of its competitors. Although Ragan currently has a technological advantage, Joshs research indicates that Ragans competitors are investigating other methods to improve efficiency. Given this, Josh believes that Ragans technological advantage will last for only the next five years. After that period, the companys growth is likely to slow to the industry average. Additionally, Josh believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Joshs assumptions, what is the estimated share price?

3. What is the industry average price-earnings ratio? What is Ragans price-earnings ratio based on Joshs estimate above in part (2)? Comment on any differences and explain why they may exist?

4. After discussion with Josh, Carrington and Jenny agree that they would like to increase the value of the companys equity. Like many small business owners, they want to retain control of the company and do not want to sell shares to outside investors. They also feel that the companys debt is at a manageable level and do not want to borrow more money. What steps can they take to increase the share price? - justify each of your suggestions.