STOCK VALUATION AT RAGAN ENGINES
Larissa has 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 Co. Yachts should consider the purc.e Man engine manufacturer to allow East Coast Yachts to better Integrate Its supply chain and get more control over engine features. Atter Investi¬gating several possible companies, bar55a feels that the purchase of Ragan Engines, Inc., is a possibility. she has asked Dan Ervin to analyze Raga's value.
Ragan Engines, Inc., was founded nine years ago by a brother and sister-Carrington and Genevieve Ragan-and has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the I Lie efficiency of Es engines with very little sacrifice in performance. The company is equally owned by Canington and Genevieve. The original agreement between Na 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 . gathered to following Information about some of Ragan, competitors that are publicly traded:
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Blue RIbbend Motors Corp.
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$1.13
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$35
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$18.25
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11.00%
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14.00%
|
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Bon Voyage Marine Inc.
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1.41
|
.43
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15.31
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14.00
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17.00
|
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Nautilus Marine Engines
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-.23
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.61
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28.72
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N/A
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13.00
|
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!Mushy average
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$.77
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$6.46
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$20.76
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12.50%
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14.67% |
Nautilus Marine Engines' negative earnings per share (EPS) was the resulted an accounting write-off I. year. Without the write-oh, EPS for the company would have been $1.75. Lag year, Ragan had an EPS of $41 0 and paid a dividend to Carrington and Genevieve of $215,000 each. The company also had a return on equity of 18 percent. Larissa tells Dan that a required realm for Ragan of 13 percent is appropriate.
1. Assuming hie company continues Its current growth tate, what is hie value per share of the company's stock.
2. Dan has examined the company's financial statements, as well as examining ton of its cornpettors, Although Ragan currently M1a a technological advantage, Dan's research indicates that Ragan, competitors are investigating other methods to improve efficiency Given this, Dan believes that Ragan, technological advantage will last only for the next five years. Atter that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock slice?
3. What is the Industry average price-earnings rano? What Is Ragan, price-earnings ratio? Comment on any differences and explain why they may exist.
4. Assume the Company's growth rate Slots to the indUaby 0000000 in five yeara. What future return on equity does this Imply?
5. Carrington and Genevieve are not sure if they should sell the company. II they do not sell the company outright to East Coast Yachts, they would like to by and increase the value of to company's stock. In this case, they want to retain Control °, The company and do not want to sell stock to outside investors.
They also feel that the company's debt is at a manageable level and do not want to borrow more money. what steps can they take to try and increase the price of the stock?. there any conditions under which this strategy would not increase the stock price?