Ragan Thermal Systems plc 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 owned equally by Carrington and Genevieve. The original agreement between the siblings gave each 50,000 shares. In the event that either wishes to sell the shares, they first have to be offered to the other at a discounted price. Although neither sibling wants to sell any shares at present, 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.
Expert HVAC plc'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. p. 146
Last year, 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 per cent. The siblings believe a required return for the company of 20 per cent is appropriate. 1. Assuming the company continues its current growth rate, what is the share price of the company's equity? 2. To verify their calculations, Carrington and Genevieve have hired Josh Jobby 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 is likely to slow to the industry average....
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