To verify their calculations, Carrington and Gene$-$vieve have hired Josh Schlessman as a consul$-$tant$.$ Josh was previously an equity analyst and covered the HVAC industry. Josh has examined the company$$s financial statements, as well as those of its competitors. Although Ragan, Inc., currently has a technological advantage, his research indicates that other companies are investigating methods to improve efficiency. Given this, Josh believes that the company$$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?

QUESTIONS

Assuming the company continues its current

growth rate, what is the value per share of the

company's stock?

To verify their calculations, Carrington and Gene$-$

vieve have hired Josh Schlessman as a consul$-$

tant$.$ Josh was previously an equity analyst and

covered the HVAC industry. Josh has examined

the company's financial statements, as well as

those of 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 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 belleves 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?CHAPTER CASE

Stock Valuation at Ragan, Inc.

$D$ agan, Inc., was founded nine years ago by brother

Rand sister Carrington and Genevieve Ragan. The

company manufactures and installs commercial heat$-$

ing, 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 dis$-$

counted price.

Although neither sibling wants to sell, they have

decided they should value their holdings in the com$-$

pany. To get started, they have gathered the following

information about their main competitors:

Expert HVAC Corporation's 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\mathrm{.}10.$

Last year, Ragan, Inc., had an EPS of $$3\mathrm{.}15$ and paid

a dividend to Carrington and Genevieve of $$45,000$ each.

The company also had a retum on equity of $17$ percent.

The siblings believe that $14$ percent is an appropriate

required return for the company.