Stock Valuation at Ragan, Inc. Ragan. Inc., was founded nine years ago by brocher and sister Carrington and Geserieve Ragan. The compasy manufactures and instalts commercial heating. ventilation, and costine (HVAC) anits. Ragan, lac, has experienced rapid growth because of a proprietary technologs that increases the energy efficiency of its units. The conpany is equally owned ty Carrington and Genevieve. The original partaership 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. Aithough neither sabling wants to sell, they have decided they should value their holdings in the company. To get started, they have gathered the iafotmation abois their main competitoss in the table below. Expert HVAC Corporatioe's nepative earnings per share were the reselt of an accoenting writeoff last jear. Without the write-off, earnings per share for the company would have been \$1.06. The ROE for Expert HVMC is based on net income excluding the write off. Last year. Rapais, Inc., had an EPS of $4.54 and paid a dividend to Carringtoe and Geserieve of $50.000 each. The coenpany also had a return on equity of 18 pereent. The siblings believe that 15 persent is ae apgropriste required reture for the coenpany. QUESTIONS 1. Assuming the company continues its curredt growth rate, what is the ralve per thare of the coenpany's stock? 2. To verify their calculations, Carrington and Genevieve have hired Josh Schlesseman as a consulzant. Josh was previonsty an equity analyst and covered the HVAC industry. Josh has examined the compary's firancial statements, as well as its competitors' finascials. Althoughi Ragan, Ine, currently has a technological actwantage, his research inaticates that orher conmpanies ase inveatigating methods to imptone efficiency. Gives this, Josh believes that the company's technolokical actuantage will last only for the next five jears. After that period. the company's growth will likely slow to the industry growth averape. Additigealfy. Jonlh believes that the reguired return used by the company is too high. He believes the industry merage fequited seturn is more approptiate. Uader this growth rate asaimption, what is your estimate of the stock price? 3. What is the industry arverage price-earnings ratio? What is the priceearnings ratio for Ragan, Inc.? Is this the relationship you would expect between the two ratios? Why? 4. Carrington and Genevieve are unsure how to interpret the price-earnings ratio. After some head seratching, they've come up with the foltowing expression for the price-earnings ratioc E1Pa=R(ROEb)1b Beginning with the constant dividend growth model. verify this result. What does this expression imply about the relationship between the dividend payout ratio, the required return on the stock, and the compary's ROF? 3. Assume the company's growth rate slons to the industry average in five years. What futute return on equity does this imply, assuming a constant payout ratio? 6. After discussing the stock value with Josh, Carrington and Genevirve agree that they would like to increase the value of the company stock. Like mary small besiness owners, they want to retain control of the comparp. so they do not want to sell stock to outsinfe investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. How can they increase the price of the stock? Are there any conditions ander which this stratery would not increase the stock price