Under Josh’s assumptions, what is the estimated stock price?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
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 indicates that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Josh believes that Ragan’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?

Transcribed Image Text:Ragan Thermal Systems, 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 has experienced rapid growth because of a proprietary technology
that increases the energy efficiency of its systems. 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 sibling 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.
Ragan Thermal Systems, Inc., Competitors
EPS
DPS
Stock Price
ROE
$ .82
1.32
$ .16
$15.19
12.49
10%
Arctic Cooling, Inc.
National Heating & Cooling
Expert HVAC Corp.
Industry average
11%
.52
14
13
-47
.54
48.60
14
12
$0.56
$0.41
$25.43
13%
11.67%
Expert HVAC Corp.'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 $2.34.
Last vear, Ragan had an EPS of $4.32 and paid a dividend to Carrington and Genevieve
of $54.000 each. The company also had a return on equity of 25 percent. The siblings believe a
required return for the company of 20 percent is appropriate,
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you


Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,

Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,


Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,

Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,

Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON

Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education

Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education