STOCK VALUATION at RAGAN, Inc
Regan Thermal System Inc was founded 9 years ago by brother and sister Carrington and Genevieve Regan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan has experienced rapid growth because of a propriety technology that increases the energy efficiency of its system. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell the stock, the shares first had to be offered to the other at a discounted price.
Although neither siblings wants to sell any shares at this time, they have decided they should value their holdings in the company for financial planning purposes. To accomplish this, they have gathered the following information about their main competitors.
EPS DPS STOCK PRICE ROE R
Arctic cooling Inc. $0.79 $0.20 $14.18 10% 10%
National Heating&Cooling 1.38 0.62 11.87 13 13
Expert HVAC Corp. -0.48 0.38 13.21 14 12
Industry average $0.56 $0.40 $13.09 12.33% 11.67%
Expert HVAC Corp.’s negative EPS were the result of an accounting write-off last year. Without the write-off, EPS of the company would have been $1.06
Last year Regan had an EPS of $4.54 and paid a dividend to Carrington and Genevieve of $63,000 each. The company also had a ROE of 25%. The siblings believe a required return for the company of 20% is appropriate.
Question 1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock?
Question 2. 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 indicated that Ragan´s competitors are investigating other methods to improve efficiency. Given this, Josh believes that Regan’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?
Question 3. What is the industry average price-earnings ratio? What is Regan’s price-earnings ratio? Comment on any differences and explain why they may exist.
Question 4. Assume the company’s growth rate declines to the industry average after five years. What percentage of the stock’s value is attributable to growth opportunities?
Question 5. Assume the company’s growth rate slows to the industry average in five years. What future return on equity does this imply?
Question 6. After discussing the stock value with the consultant, Genevieve and Carrington agree that they would like to increase the value of the company stock. Like many small business owners, they would like to retain control of the company, but they 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. How can they increase the price of the stock? Are there any conditions under which such an action would not increase the stock price?