CHAPTER CASE Stock Valuation at Ragan, Inc. agan, Inc., was founded nine years ago by brother sister 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 de- cided they should value their holdings in the company. To get started, they have gathered the following infor- mation about their main competitors: 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 those of its com- petitors. Although Ragan, Inc., currently has a tech- nological advantage, his research indicates that Ragan, Inc. - Competitors R Stock EPS Div. Price ROE $.39 $17.83 16.00% 10.00% 65 19.23 14.00 13.00 Arctic Cooling. $.84 Inc. National Heating & 1.34 Cooling Expert HVAC Corp Industry 43 18.14 15.00 $.54 $.49 $18.40 15.00 12.00 11.67 average 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 com pany would have been $.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 ap propriate required return for the company. other companies are investigating methods to im prove efficiency. Given this, Josh believes that the company's technological advantage will last only for the next five years. After that period, the com pany's growth will likely slow to the industry growth average. Additionally, Josh believes that the re- quired return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate assump tion, what is your estimate of the stock price?

CHAPTER CASE Stock Valuation at Ragan, Inc. agan, Inc., was founded nine years ago by brother sister 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 de- cided they should value their holdings in the company. To get started, they have gathered the following infor- mation about their main competitors: 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 those of its com- petitors. Although Ragan, Inc., currently has a tech- nological advantage, his research indicates that Ragan, Inc. - Competitors R Stock EPS Div. Price ROE $.39 $17.83 16.00% 10.00% 65 19.23 14.00 13.00 Arctic Cooling. $.84 Inc. National Heating & 1.34 Cooling Expert HVAC Corp Industry 43 18.14 15.00 $.54 $.49 $18.40 15.00 12.00 11.67 average 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 com pany would have been $.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 ap propriate required return for the company. other companies are investigating methods to im prove efficiency. Given this, Josh believes that the company's technological advantage will last only for the next five years. After that period, the com pany's growth will likely slow to the industry growth average. Additionally, Josh believes that the re- quired return used by the company is too high. He believes the industry average required return is more appropriate. Under this growth rate assump tion, what is your estimate of the stock price?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 19E

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