Section 1: Problem Statement 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 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 company. In the event either wished to sell their stock, the shares first would have to be offered to the other at a discounted price. Although neither sibling wants to sell, they have decided that they should determine the value of their ownership in the company. To get started, they have gathered information about their main competitors, provided in the table on the next page. One of their competitors, Expert HVAC Corp., had negative Earnings Per Share last year, due the result of a one-time accounting write-off. Had the write-off not occurred, Earnings Per Share for that company would have been $1.10. The Return On Equity for Expert HVAC Corp is based on net income excluding the one-time write-off. Last year, Ragan, Inc., had an Earnings Per Share 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. (continued on next page) Assignment #2 - Page 2 of 2 Section 1: Problem Statement (continued) Company name Arctic Cooling, Inc. National Heating & Cooling Expert HVAC Corp. Industry average Ragan, Inc. - Competitors EPS DPS Stock Price $1.30 $0.16 $25.34 1.95 0.23 29.85 -0.37 0.14 22.13 $0.96 $0.18 $25.77 ROE 8.50% 10.50 9.78 9.59% R 10% 13 12 11.67% Section 2: Questions Your submission should clearly show all data and formulas needed to calculate your answers. There are several steps required to arrive at each final answer. Make sure to demonstrate each step clearly, because partial credit is available even if your final answer is incorrect. Remember to put your name and date on your assignment submission! 1) Assuming Ragan, Inc., continues at its current growth rate, what is the value per share of the company's stock? HINT: Valuation is based on company EPS, ROE and dividend. 2) To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst who covered the HVAC industry. Josh has examined the company's financial statements, as well as examining its competitors' financials. 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 competitive advantage will only last for the next five years. After that time period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the required retum 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 for the stock price of Ragan, Inc.? HINT: Valuation is based on industry EPS, ROE and dividend. Section 1: Problem Statement 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 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 company. In the event either wished to sell their stock, the shares first would have to be offered to the other at a discounted price. Although neither sibling wants to sell, they have decided that they should determine the value of their ownership in the company. To get started, they have gathered information about their main competitors, provided in the table on the next page. One of their competitors, Expert HVAC Corp., had negative Earnings Per Share last year, due the result of a one-time accounting write-off. Had the write-off not occurred, Earnings Per Share for that company would have been $1.10. The Return On Equity for Expert HVAC Corp is based on net income excluding the one-time write-off. Last year, Ragan, Inc., had an Earnings Per Share 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. (continued on next page) Assignment #2 - Page 2 of 2 Section 1: Problem Statement (continued) Company name Arctic Cooling, Inc. National Heating & Cooling Expert HVAC Corp. Industry average Ragan, Inc. - Competitors EPS DPS Stock Price $1.30 $0.16 $25.34 1.95 0.23 29.85 -0.37 0.14 22.13 $0.96 $0.18 $25.77 ROE 8.50% 10.50 9.78 9.59% R 10% 13 12 11.67% Section 2: Questions Your submission should clearly show all data and formulas needed to calculate your answers. There are several steps required to arrive at each final answer. Make sure to demonstrate each step clearly, because partial credit is available even if your final answer is incorrect. Remember to put your name and date on your assignment submission! 1) Assuming Ragan, Inc., continues at its current growth rate, what is the value per share of the company's stock? HINT: Valuation is based on company EPS, ROE and dividend. 2) To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst who covered the HVAC industry. Josh has examined the company's financial statements, as well as examining its competitors' financials. 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 competitive advantage will only last for the next five years. After that time period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the required retum 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 for the stock price of Ragan, Inc.? HINT: Valuation is based on industry EPS, ROE and dividend