Stock Valuation at Ragan Engines

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Regan Thermal System Inc was founded 9 years ago by brother and sister Carrington and Genevieve Regan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan has experienced rapid growth because of a propriety technology that increases the energy efficiency of its system. 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 siblings 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.

EPS DPS STOCK PRICE ROE R Arctic cooling Inc. $0.79 $0.20 $14.18 10% 10% National Heating&Cooling 1.38 0.62 11.87 13 13 Expert HVAC Corp. -0.48 0.38 13.21 14 12 Industry average $0.56 $0.40 $13.09 12.33% 11.67%

Expert HVAC Corp.’s negative EPS were the result of an accounting write-off last year. Without the write-off, EPS of the company would have been $1.06 Last year Regan had an EPS of $4.54 and paid a dividend to Carrington and Genevieve of $63,000 each. The company also had a ROE of 25%. The siblings believe a required return for the company of 20% is appropriate.

Question 1. Assuming the company continues its current growth rate, what is the value per share of the company’s stock?

Question 2. 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...
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