Stock and Company

Topics: Stock, Stock market, HVAC Pages: 2 (505 words) Published: September 17, 2013
Stock Valuation at Ragan, Inc.

Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, 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 discounted price.

Although neither sibling wants to sell, they have decided they should value their holdings in the company. 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 $0.54.

Last year, Ragan, Inc., had an EPS of $4.85 and paid a dividend to Carrington and Genevieve of $75,000 each. The company also had a return on equity of 17 percent. The siblings believe that 14 percent is an appropriate required return for the company.

Ragan, Inc. - Competitors
CompanyEPSDiv.Stock PriceROER
Arctic Cooling0.840.3917.8316.00%10.00%
National Heating1.340.6519.2314.00%13.00%
Expert HVAC-0.550.4318.1415.00%12.00%
Industry Average0.540.4918.4015.00%11.67%

Questions

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

SOLUTION:
Total dividend= (75000x2) = $150000
Total earning= (50000x4.85) = $242500
Payout ratio= 150000/242500= .62
Retention ratio= (1-.62) = .38
g= ROExb= .17x.38= .065 or 6.5%
D0= 75000/50000=1.5
P0= D1/(Ke-g)= (1.5x1.14)/(.14-.065)= $22.8

2. To verify their calculations, Carrington and Genevieve have haired...
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