Ranger Sports

Ten years ago, in 2008, George Ranger founded small mail order company selling high-quality
sports equipment. Ranger Sports has grown steadily and been consistently profitable (Table 1).
The company has no debt and the equity is valued in the company’s books at nearly ₹41 crore
(Table 2). It is still wholly owned by George Ranger.

George has hired Evergreen Brothers in January 2018 to identify a strategic investor who can buy
90,000 of his existing shares and also planned to take the company public in late December 2019.
Though the sale of 90,000 shares would not raise any additional cash for the company, it would
allow George to cash in on part of his investment. It would also make it easier to raise the
substantial capital sums that the firm would later need to finance expansion.

George’s business has been operated mainly on the Coromandel Coast of the India, but he plans
to expand into the Central India in 2019. This will require a substantial investment in new
warehouse space and inventory. George is aware that it will take time to build up a new customer
base, and in the meantime there is likely to be a temporary dip in profits. However, if the venture
is successful, the company should be back to its current 12% return on book equity by 2024.

George settled down to estimate what his shares are worth. First, he estimated the profits and
investment through 2024 (Tables 3 and 4). The company’s net working capital includes a
growing proportion of cash and marketable securities which would help to meet the cost of the
expansion into the Central India. Nevertheless, it seemed likely that the company would need to
raise about ₹4.30 crores in Dec. 2019 by the sale of new shares to general public. (George
distrusted banks and is not prepared to borrow to finance the expansion.)

Until the new venture reached full profitability, dividend payments would have to be restricted to
conserve cash, but from 2025 onwards George expected the company to payout about 40% of its
net profits. As a first step at valuing the company, George assumed that after 2017 it would earn
12% on book equity indefinitely and that the cost of capital for the firm was about 10%. But he
also computed a more conservative valuation, which recognized that the mail-order sports
business was likely to get increasingly competitive. He also looked at the market valuation of a
comparable business operating in the Western India, Molly Sports. Molly’s shares were currently
priced at 50% above book value and were selling on a prospective price-earnings ratio of 12 and a
dividend yield of 3%.

George realized that the initial public offering of equity shares in Dec. 2019 would dilute his
holdings. He set about calculating the price at which these shares could be issued and the number
of shares that would need to be sold. That allowed him to work out the dividends per share and to
check his earlier valuation by calculating the present value of the stream of per-share dividends.

Questions

1. Use Tables 3 and 4 to forecast the free cash flow for Ranger Sports from 2018 to 2024.
What is the PV of these cash flows in 2017, including PV(horizon value in 2024)?
2. Use the information given for Molly Sports to check your forecast of horizon value. What
would you recommend as a reasonable range for the present value of Ranger Sports?
3. What is the Present value of a share of stock in the company? Give a reasonable range.
4. Ranger Sports has to raise ₹ 4.30 crores in 2019. Does this prospective share issue affect
the per-share value of Ranger Sports in 2017? Explain.

Brealey Richard A., and Myers Stewart C., (2000), Chapter 4, The Value of Common Stocks, Principles of
Corporate Finance, 6th Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, pp. 90-91.
 Table 1
Ranger Sports Ltd.
Summary income data (figures in ₹ crores)

Financial year ended Dec. 31,  2013 2014 2015 2016 2017
Operating Profit (EBITDA) 5.84 6.40 7.41 8.74 9.39
Depreciation 1.45 1.60 1.75 1.97 2.22
Pre-tax profits 4.38 4.80 5.66 6.77 7.17
Tax 1.53 1.68 1.98 2.37 2.51
After-tax profits 2.85 3.12 3.68 4.40 4.66
Note: Ranger Sports has never paid a dividend and all the earnings have been retained in the business.

Table 2
Ranger Sports Ltd.
Summary balance sheet for year ending December 31 st (figures in ₹ crores)

Assets     Liabilities and Equity

2016 2017 2016 2017
Cash and securities 3.12 3.61 Current liabilities 2.90 3.21
Other current assets 15.08 16.93
Net fixed Assets 20.75 23.38 Equity 36.05 40.71
Total 38.95 43.92   Total   38.95 43.92
Note: Ranger Sports has 200,000 common shares outstanding, wholly owned by George Ranger.

Table 3
Ranger Sports Ltd.
Forecasted profits and dividends (figures in ₹ crores)

Financial year ended Dec. 31, 2018 2019 2020 2021 2022 2023 2024
Gross profits 10.47 11.87 7.74 8.40 9.95 12.67 15.38
Depreciation 2.40 3.10 3.12 3.17 3.26 3.44 3.68
Pre-tax profits 8.08 8.77 4.62 5.23 6.69 9.23 11.70
Tax 2.83 3.07 1.62 1.83 2.34 3.23 4.09
After-tax profits 5.25 5.70 3.00 3.40 4.35 6.00 7.61
Dividends 2.00 2.00 2.50 2.50 2.50 2.50 3.00
Retained earnings 3.25 3.70 0.50 0.90 1.85 3.50 4.60

Table 4
Ranger Sports Ltd.
Forecasted investment expenditures (figures in ₹ crores)

Financial year 2018 2019 2020 2021 2022 2023 2024

Gross investment in fixed assets 4.26 10.50 3.34 3.65 4.18 5.37 6.28
Investment in NOWC 1.39 0.60 0.28 0.41 0.93 1.57 2.00
Total 5.65 11.10 3.62 4.07 5.11 6.94 8.28

Brealey Richard A., and Myers Stewart C., (2000), Chapter 4, The Value of Common Stocks, Principles of
Corporate Finance, 6th Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, pp. 90-91.