Question

Please note that I recognize that this has several solutions already posted - I am having particular difficulties with #4, and it is the ONLY question included in my post. I need to show my work and am really struggling with answering this question in entirety.

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.	$1.09	$.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	$   .69	$.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.

4. Assume the company’s growth rate declines to the industry average after five years. What percentage of the stock’s value is attributable to growth opportunities?

Answer 1

i Firstly, calculating total earnings of the company : Total Earnings = 2 x No.of shares * Eps (last year] = 2 X 1,50,000 x 5.35 1,605,000 Now, calculating cash Cash cow value = cow value of the company Total Earnings Industry Average Required 1,605,000 0.15 Return = 10,700,000 As per the growth- share matrix calculate the Industory Eps, Industry Eps = Eps of three companies No. of tompanies 1. 19 + 1.26 +2.07 3 = 4.52 = 1.5067 ~ 1.51

Then Payout Ratio - Industry Average of Ops Industry Eps 1.51 = 0.2913 = 29.13 ... Industry Retention Ratio = .1- Industry payout oratio =1-0.2913 - 07087 = 0.87*10 Industry Growth Rate = Industry RoE IRR - 0.11 0.7087 (From table] = Ca 0071957 = 7.79140 ... Growth rate of Industry. = 7.79.10 calculating the dividend for the year 's as company has consistent growth over next five years By formula, Intia Dn (itg) = 640,000 (i+ 0.1263)

* Dnti = $720, 807.48 4 · Dividend four year = $ 720, 807.48 Dividend for and year, Ont i = Da litg) = 420,807.48 (1+ 0.1263) = 811,845.467 Dividend for year 3, Dnti = On (tg) = 811,845.46 (1+ 0.1263) = $914,381.54 Dividend for year , Pnti = On (lag) =914,381.54 (1+0.1263) = 1029,867.92 Dividend for years, Ont i = Dn (itg) = 1029,867.92 (1+0.1263) = 1, 159, 940.238

calculating value the value of the stock in years 's' Os (o + Industry growth rate) of the Stock , . (sndustry Return - Industry growth rate) - 1159, 160-238 (+ 0.0781) (0.15-0.0781) = 1,250, 531.57 0-0791 = $17, 392, 650.48 stock (pu) by using compute the present value of the the equation given below:- Pue cela mise en forma de gran te nangis + Ds + Stock value in year 5 (1+ Rjhth · 720,807.48 (1+0.15) 811, 845.467 (1+0.15) 8 914,381.57 (1+0.15)3 1029,867.92 (1+0.1534 ) + 1,159,940-238+ 17,392,650.48 (1+0.15)

720807.418 - 1:15 811845.464 + 914 381.54 1.3225 1.5208 1029867.92 1749 + + 18552590.718 2.0113 = 626789.113 + 613871.8034 + 601250.3555 + 588832.4299 + 9224178.7490 PV = 11654922.4502 calculating pul of the company with no attribute to qorowth rate (x) by using cash cow name pu of the Stock 10,700,000 11654922.450 = 8.9180 = 91.800% with attribute to growth opportunity (4) is Y-1-X = -0.9180 -0.082. = 8. 20% is the % of the attributable to Stock's value growth opportunity