CASE 2 Ryan International In the world of skateboard attire, instinet and market

Question

CASE 2 Ryan International In the world of skateboard attire, instinet and marketing savvy are prerequisites to success. Moogy Ellis had both. During 2017, his international skateboarding company, Ryan, rocketed to $700 million in sales after 10 years in business. His fashion line covered the skateboarders from head to toe with hats, shirts, pants, shorts, sweatshirts, socks, and shoes. In L.A., there was a Ryan shop every five or six blocks, each featuring a different color. Some shops showed the entire line in mauve, and others featured it in canary yellow Ryan had made it. The company's historical growth was so spectacular that no one could have predicted it. However, securities analysts speculated that Ryan could not keep up the pace. They warned that competition is fierce in the fad fashion industry and that the firm might encounter little or no growth in the future. They estimated that stockholders also should expect no growth in future dividends. Contrary to the conservative securities analysts, Moogy Ellis feels that the company could maintain a constant annual growth rate in dividends per share of 8% in the future, or possibly 12% for the next 2 years and 8% thereafter. Ellis based his estimates on an established long-term expansion expected to cause the risk of the fimm, as measured by the beta on its stock, to increase immediately from 1.15 to 1.25 plan into European and Latin American markets. Venturing into these markets was In preparing the long-term financial plan, Ryan's chief financial officer has assigned a junior financial analyst, Brad Harris, to evaluate the firm's current stock price. He has asked Brad to consider the conservative predictions of the securities analysts and the aggressive predictions of the company founder, Moogy Ellis.

Explanation / Answer

1. If g= 8%

Po= d1/ke-g

P0= 2.35*(1.08)/0.1275-0.08= 2.538/0.0475= 53.43$ per share

2. If growth rate is 12% for 2 years then 8%

Price= 2.632/1.1275+ 2.95/(1.1275)2+ {(3.186/0.1275- 0.08)}/(1.1275)2= 57.42$

3. Values are 37.5 $ book value per share

Value of stock= 18.43$

Intrinsic value using constant growth= 53.43$

Value using 2 period growth = 57.42$

The best method would be using double period growth because it clearly reflects the value of share.

As it is not possible to have a constant growth period.

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