Stock Valuation at Ragan Engines

Information Given:

Shares owned by each sibling 150,000

Ragan EPS $5.35

Dividend to each sibling $320,000

Ragan ROE 21%

Ragan required return 18%

Blue Ribband Motors Corp.

EPS $1.19

DPS $0.19

Stock price $16.32

ROE 10.00%

R 12.00%

Bon Voyage Marine, Inc.

EPS $1.26

DPS $0.55

Stock Price $13.94

ROE 12.00%

R 17.00%

Nautilus Marine Engines

EPS $(0.27)

DPS $0.57

Stock Price $23.97

ROE N/A

R 16.00%

Industry average

EPS $0.73

DPS $0.44

Stock Price $18.08

ROE 11.00%

R 15.00%

Nautilus EPS w/o write-off $2.07

Questions to be answered:

1) Assuming the company continues its current growth rate, what is the value per share of the company's stock?

Total earnings

Payout ratio ______

Retention ratio ______

Growth rate _______

Total dividends next year _______

Total equity value _______

Value per share _______

2) Dan has examined both the company's financial statements and those of its competitors. Although Ragan currently has a technological advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will only last for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price?

Industry EPS

Industry payout ratio _____

Industry retention ratio _____

Industry growth rate ______

Year Total dividends

1 ______

2 ______

3 ______

4 ______

5 ______

6 ______

Stock value in Year 5

Total stock value today ________

Value per share _________

3) What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist.

Industry PE ______

Ragan PE (original assumption) ______

Ragan PE (revised assumption) _______

Stock price implied by industry PE ________

4) Assume the company's growth rate declines to the industry average after 5 years. What percentage of the stock's value is attributable to growth opportunities?

Total earnings _______

Cash cow value ________

Percentage not attributable to growth opportunities ______

Percentage attributable to growth opportunities ______

5) Assume the company's growth rate slows to the industry average in 5 years. What future return on equity does this imply?

ROE _______

6) Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company outright to East Coast Yachts, they would like to try and increase the value of the company's stock. In this case, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. What steps can they take to try to increase the price of the stock? Are there any conditions under which this strategy would not increase the stock price?

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