Question

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 Coast Yachts should consider the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan’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 fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 150,000 shares of stock.

Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of Ragan’s competitors that are publicly traded:

	EPS	DPS	Stock Price	ROE	R
Blue Ribband Motors Corp.	$1.19	$.19	$16.32	10.00%	12.00%
Bon Voyage Marine, Inc.	1.26	.55	13.94	12.00	17.00
Nautilus Marine Engines	(.27)	.57	23.97	N/A	16.00
Industry average	$   .73	$.44	$18.08	11.00%	15.00%

Nautilus Marine Engines’s negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $2.07. Last year, Ragan had an EPS of $5.35 and paid a dividend to Carrington and Genevieve of $320,000 each. The company also had a return on equity of 21 percent. Larissa tells Dan that a required return for Ragan of 18 percent is appropriate.

Please show calculations

Q1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock?

Q2. 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 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 price?

Q3. What is the industry average price? earnings ratio? What is Ragan’s price? earnings ratio? Comment on any differences and explain why they may exist.

Q4. Assume the company’s growth rate declines to the industry average in five years. What percentage of the stock’s value is attributed to growth opportunities?

Q5. Assume the company’s growth rate slows to the industry average in five years. What future return on equity does this imply?

Q5. Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company outright to East Coast Yachts, they would like to try and increase the value of the company’s stock. In this case, they want to retain control of 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? Are there any conditions under which this strategy would not increase the stock price?

Answer 1

First let me explain you what is EPS and PE Ratio.

EPS indiacteds that company is earning in millions but how much your share price boosting along with company profile. Formula to calucate EPS is

PAT(profit after TAX) / Outstanding shares of the company.

example : 1000/10=100

it means your share has boosted 100 with companys' profit

PE Ratio : It indicates that how much additional amount is spending in the market to buy particular share

Formula = EPS/ current share price of the company  

example = 100/10 = 10

it means you are paying additional 10 rs to buy the share of the company  

Here the details of the companies in similar industry are given.

According to below calculation adjusted industry PE ( Price to Earnings) will be 14.48

	EPS	Stock Price	PE
Blue Ribband Motor corp	1.24	20.1	16.21
Bon Voyage	1.55	16.85	10.87
Nautilus	1.93	31.6	16.37
Average	1.57		14.48

Here Rangan EPS is 3.65

If we average PE/Valuation of Rangan stock as per the industry Standards then we get the price of Rangan stock as

3.65/14.48 = 52.87

please give me like if this answer is helpful.