Tom Warren founded East Coast Yachts. The company$$s operations

are located near Hilton Island, South Carolina, and the company is structured

as a sole proprietorship. The company has manufactured custom midsize,

high$-$performance yachts for clients and its products have received high

reviews for safety and reliability..

Tom retired from the day$-$to$-$day operations of the company and turned the operations of the company to Larissa who decided that the company should be reorganized as a corporation and today the company is publicly traded under the ticker symbol $$ECY$.$

Dan Irvin was recently hired by East Coast Yachts to assist company

with its short$-$term financial planning, and also to evaluate company$$s

financial performance. Larissa decided to expand the company's

operations, and she asked Dan to enlist an underwriter to help sell $$45$

million in new $30-$year bonds to finance new construction. Dan has entered

into discussions with Renata Harper, an underwriter from the firm of Crowe &

Mallard, about which bond features East Coast Yachts should consider, and

also what coupon rate the issue would likely have. Although Dan is aware of

bond features, he is uncertain as to the cost and benefit of some of them, so

he isn't clear on how each feature would affect the coupon rate of the bond

issue.

Larissa has also been talking with the company's directors about the

future of East Coast Yachts. To this point, the company has used outside

suppliers for various key components of the company's yachts, including

engines. Larissa has decided that East Coast Yachts should consider the

purchase of an engine manufacturer to allow East Coast Yachts to better

integrate its supply chain and get more control over engine features. After

investigating several possible companies, Larissa feels that the purchase of

Ragan Engines, Inc. is a possibility. She has asked Dan Irvin to analyze

Ragan'svalue.

Ragan Engines, Inc. was founded $9$ years ago by a brother and sister $$

Carrington and Genevieve Ragan $$ and has remained a privately owned

company. The company manufacturers marine engines for a variety of

applications. Ragan has experienced rapid growth because of a proprietary

technology that increases the fuel efficiency of its engines with very little

sacrifice in performance. The company is equally owned by Carrington and

Genevieve. The original agreement between the siblings gave each $125,000$

shares of stock.

Larissa has asked Dan to determine a value per share of Ragan stock.

To accomplish this, Dan has gathered the following information about some

of Ragan's competitors that are publicly traded:

Earnings per share $($EPS$)$ Dividend per share $($DPS$)$ Stock price per share Estimated growth rate Required rate of return $($R$)$

Blue Ribband Motors Corp. $$1\mathrm{.}24$ $$0\mathrm{.}39$ $$20\mathrm{.}107\mathrm{.}54\%15\%$

Bon Voyage Marine, Inc. $$1\mathrm{.}55$ $$0\mathrm{.}47$ $$16\mathrm{.}859\mathrm{.}75\%17\%$

Nautilus Marine Engines $-$$$0\mathrm{.}25*$ $$0\mathrm{.}67$ $$31\mathrm{.}608\mathrm{.}06\%13\%$

$*$ Nautilus Marine Engine$$s negative EPS was the result of a non$-$recurring accounting write$-$off last year. Without the write$-$off, EPS for the company would have been $$1\mathrm{.}93.$

$3.$ Dan is considering whether to issue coupon$-$bearing bonds or zero$-$coupon

bonds. The YTM $($yield to maturity$)$ on either bond issue will be $5\mathrm{.}5\%.$ The

coupon bond would have a $5\mathrm{.}5\%$ coupon rate and coupon is paid semi$-$

annually. Assume the company$$s tax rate is $21\%,$ and interest is

compounded every $6$ months.

a$.$ How many of the coupon bonds must East Coast Yachts issue to

raise the $$45$ million? In $30$ years, what will be the principal

repayment due if East Coast Yachts issues the coupon bonds?

b$.$ How do the answers in $($a$)$ change if the coupon rate is set at $4\%$

instead of $5\mathrm{.}5\%?$

c$.$ How do the answers in $($a$)$ change if only using zeroes $($i$.$e$.,$ zero$-$

coupon bonds$)$ as the source of financing?

d$.$ Would you recommend a zero coupon issue or a regular coupon

issue, why?

$4.$ Last year, Ragan Engines had an EPS of $$3\mathrm{.}65$ and paid a dividend to

Carrington and Genevieve of $$195,000$ each. Each of them has $125,000$

shares. The company also has an estimated earnings growth rate of

$10\mathrm{.}3\%.$ Larissa tells Dan that a required return for Ragan Engines of $13\%$

is appropriate. Assuming Ragan Engines continues its current growth rate,

what is its estimated stock price?

$5.$ Dan has examined the company$$s financial statements and those of its

competitors. Although Ragan Engines 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 last only for the next $5$

years. After that period, the company$$s growth will likely slow to the

industry average. Additionally, Dan believes that the required return of

$13\%$ is too low. He believes that the industry average required return is

more appropriate. Under Dan$$s assumptions, what is the estimated stock

price?