Ragan, Inc., was founded nine years ago by brother and sister Carrington and Gen
ID: 2703638 • Letter: R
Question
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
Explanation / Answer
1.
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.
Industry EPS= (.84+1.43+.54)/3= .91
Industry Payout ratio= .49/.91= .54
Industry retention ratio= 1-.54= .46
g= 15x.46= 6.9%
D6= 1.5x1.14^6= 3.2925
Stock price in year 5 with the Industry rate of return
= 3.2925/(.1167-.069)= $69.02
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