Stock Valuation at Ragan, Inc. Ragan, Inc, was founded nine years ago by brother and sister they have gathered the information about their main competiCarrington and Genevieve Ragan. The company manufac- tors in the table below. fures and installs commercial heating, ventilation, and cooling Expert HVAC Corporation's negative earnings per share (HVAC) units. Ragan. Inc., has experienced rapid growth were the result of an accounting write-off last year. Without because of a proprietary technology that increases the energy the write-off, earnings per share for the company would have efficiency of its units. The company is equally owned by Car- been \$1.06. The ROE for Expert HVAC is based on net income rington and Genevieve. The original partnership agreement excluding the write-off. between the siblings gave each 50.000 shares of stock. In the Last year, Ragan, Inc., had an EPS of \$4.54 and paid a event either wished to sell stock, the shares first had to be dividend to Carrington and Genevieve of $60.000 each. The offered to the other at a discounted price. company also had a return on equity of 18 percent. The siblings Although neither sibling wants to sell, they have decided believe that 15 percent is an appropriate required return for the they should value their holdings in the company. To get started, company. QUESTIONS 1. Assuming the company continues its current growth rate, what is the value per share of the company's 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 company's financial statements, as well as 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 technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the required return 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 of the stock price? Stock Valuation at Ragan, Inc. Ragan, Inc, was founded nine years ago by brother and sister they have gathered the information about their main competiCarrington and Genevieve Ragan. The company manufac- tors in the table below. fures and installs commercial heating, ventilation, and cooling Expert HVAC Corporation's negative earnings per share (HVAC) units. Ragan. Inc., has experienced rapid growth were the result of an accounting write-off last year. Without because of a proprietary technology that increases the energy the write-off, earnings per share for the company would have efficiency of its units. The company is equally owned by Car- been \$1.06. The ROE for Expert HVAC is based on net income rington and Genevieve. The original partnership agreement excluding the write-off. between the siblings gave each 50.000 shares of stock. In the Last year, Ragan, Inc., had an EPS of \$4.54 and paid a event either wished to sell stock, the shares first had to be dividend to Carrington and Genevieve of $60.000 each. The offered to the other at a discounted price. company also had a return on equity of 18 percent. The siblings Although neither sibling wants to sell, they have decided believe that 15 percent is an appropriate required return for the they should value their holdings in the company. To get started, company. QUESTIONS 1. Assuming the company continues its current growth rate, what is the value per share of the company's 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 company's financial statements, as well as 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 technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry growth average. Additionally, Josh believes that the required return 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 of the stock price