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 information about their main competitors in the table below.

Expert HVAC Corporations 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 $1.10. The ROE for Expert HVAC is based on net income excluding the write-off.

Last year, Ragan, Inc., had an EPS of $3.15 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.

1. Assuming the company continues its current growth rate, what is the value per share of the companys stock?

2. 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 companys financial statements, as well as examining 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 companys technological advantage will last only for the next five years. After that period, the companys growth will likely slow to the industry growth average. Addition-ally, Josh believes that the required return used by the company is too high. He believes the industry average re-quired return is more appropriate. Under this growth rate assumption, what is your estimate of the stock price?

3. What is the industry average priceearnings ratio? What is the priceearnings ratio for Ragan, Inc.? Is this the relationship you would expect between the two ratios? Why?

4. Assume the companys growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio?

Ragan, Inc., Competitors ROE EPS DPS Stock Price $1.30 $.16 $25.34 Arctic Cooling, Inc. 8.50% 10.00% National Heating & Cooling 1.95 23 29.85 10.50 13.00 Expert HVAC Corp. -.37 14 22.13 9.78 12.00 $.96 $.18 $25.77 Industry Average 9.59% 11.67% Ragan, Inc., Competitors ROE EPS DPS Stock Price $1.30 $.16 $25.34 Arctic Cooling, Inc. 8.50% 10.00% National Heating & Cooling 1.95 23 29.85 10.50 13.00 Expert HVAC Corp. -.37 14 22.13 9.78 12.00 $.96 $.18 $25.77 Industry Average 9.59% 11.67%