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 in 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. The get started, they have gathered the following information about their main competitors: Ragan Incorporation, Competitors Arctic Cooling, Inc. National Heating & Cooling 1.38 Expert HVAC Corp. Industry Average EPS (S)DPS ($) Stock Price ($)ROE (%)R (%) 0.79 0.20 |14.18 0.62 11.87 |-0.48 13.21 0.40 13.09 10.00 10.00 13.00 12.00 11.67 13.00 0.38 14.00 0.56 12.33 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 $1.06. Last year, Ragan, Inc., had an EPS of $4.54 and paid a dividend to Carrington and Genevieve of $63,000 each. The company also had a return on equity of 25%. The siblings believe that 20% is an appropriate required return for the company.

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter14: Choice Of Business Entity—operations And Distributions

Section: Chapter Questions

Problem 72TA

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To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst, and he has covered the HVAC industry. Josh has examined the company’s financial statements as well as those of its competitors. Although Ragan currently has a technological advantage, Josh’s research indicates that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Josh believes that Ragan’s technological advantage will last for only the next five years. After that period, the company’s growth will likely slow to the industry average. Additionally, Josh believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Josh’s assumptions, what is the estimated stock price?

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 in 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. The get started, they have gathered the
following information about their main competitors:
Ragan Incorporation, Competitors
EPS (S) DPS ($) Stock Price ($) ROE (%)R (%)
0.20
10.00
13.00
10.00
13.00
Arctic Cooling, Inc.
National Heating & Cooling 1.38
Expert HVAC Corp.
Industry Average
0.79
|14.18
11.87
0.62
|-0.48 0.38
0.40
13.21
14.00
12.33
12.00
0.56
13.09
11.67
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 $1.06.
Last year, Ragan, Inc., had an EPS of $4.54 and paid a dividend
to Carrington and Genevieve of $63,000 each. The company
also had a return on equity of 25%. The siblings believe that
20% is an appropriate required return for the company.

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