EPS DPS STOCK PRICE ROE ROA Blue Ribband Motors Corp. $ 1.24 $ 0.39 $ &n

	EPS	DPS	STOCK PRICE	ROE	ROA
Blue Ribband Motors Corp.	$ 1.24	$ 0.39	$ 20.10	11.00%	14.00%
Bon Voyage Marine, Inc.	1.55	0.47	16.85	14.00%	17.00%
Nautilus Marine Engines	(0.25)	0.67	31.60	N/A	13.00%
Industry average	0.85	0.51	22.85	12.50%	14.67%

The company is equally owned by Carrington and Genevieve. The original agreement between the 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 has gathered the following info about some public competitors. Nautilus Marine Engines (EPS) was the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $1.93. Last year, Ragan had an EPS of $3.65 and paid a dividend to Carrigton and Genevieve for $195,000 each. The company also had a ROE of 18%. Larissa teslls Dan that a required return for Ragan of 13% is appropriate.

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2. Dan has examined the company’s financial statements, as well as examining those of its competitors. Although Ragan currently has a technological advantage, Dan’s research indicates that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan’s technological advantage will last only for the next five years. After that period, the company’s growth will likely slow to the industry average. Additionally, Dan believes the industry average required return is more appropriate. Under Dan’s assumptions, what is the estimated stock price? (Do not round intermediate calculations)

a. Calculate the industry's average growth rate. You may need to adjust for nonrecurring events that would impact the industry information

Average Industry Growth Rate =

b. Calculate the Dividends for Ragan for each of the next 6 years

c. What is the value of the stock today and what is the value per share?

Expert Solution

After adjusting for nonrecurring events (Nautilus Marine Engines)
a. Av. Industry growth rate= Av.ROE*Retention Ratio
ie. 12.50%*((1.57-0.51)/1.57)
8.44%

b. Calculation of Dividends for Ragan for each of the next 6 years
Ragan's Year 0 DPS= $ 195000/125000 shs.=	1.56
Ragan's EPS=	3.65
Retention Ratio=(3.65-1.56)/3.65=	57.26%
Ragan's growth rate=ROE*RR=
18%*57.26%=	10.31%

Ragan's Dividends for the next 6 yrs.
D1	3.65*(1+10.31%)^1=	4.0263
D2	3.65*(1+10.31%)^2=	4.4414
D3	3.65*(1+10.31%)^3=	4.8993
D4	3.65*(1+10.31%)^4=	5.4045
D5	3.65*(1+10.31%)^5=	5.9617
D6	3.65*(1+10.31%)^6=	6.5763	(as per this growth rate)

If the current growth rate of Ragan continues,
then value per share will be
3.65*(1.1031)/(18%-10.31%)=	52.36

C. Stock price as per Dan's assumptions--g=8.44% (Ind. Av. g )after Yr.5			PV F at 13%	PV at 13%
D1	3.65*(1+10.31%)^1=	4.0263	0.884956	3.563111
D2	3.65*(1+10.31%)^2=	4.4414	0.783147	3.47829
D3	3.65*(1+10.31%)^3=	4.8993	0.69305	3.395488
D4	3.65*(1+10.31%)^4=	5.4045	0.613319	3.314657
D5	3.65*(1+10.31%)^5=	5.9617	0.54276	3.235751
Value at end Yr.5(5.9617*(1.0844)/(13%-0.0844)=		141.773	0.54276	76.94893
Stock Value at Year 0				93.93622
Value per share=			ie.	93.94

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