Blue Ribband Motors Corp.
Bon Voyage Marine Inc.
Nautilus Marine Engines
Nautilus Ma rine Engines's negative ea rn ings per sha re (EPS) were the result of an acc o ing write-off last year. Without the write-off, EPS for th e company would have been S1. La st year, Ragan had an EPS of $5. 08 and paid a d ivid end to Carrington and Geneviex 5320,000 each . The company also had a return o n equity of 25 percent. Larissa tells D that a required return for Ragan of 20 percent is app ropriate. I. Assuming the company continues its current growth rate, wh at is the valu e per sha of the company's sto ck? 2. Dan ha s examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently ha s a technological advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency Gi ven this, Dan believes th at Ragan's techn ological advantage will last only for the next five years. After th at period , the co mpa ny's growth will likely slow to the industry average. Addition ally, Dan believe s that the required return the company uses is to o high . He believes the industry average required return is more appropriate. Under Dan's assumptions, what is th e estimated stock price? 3. What is the industry average price-earnings rati o? What is Ragan's price -earnings ratio? Co m me n t o n any differences and explain why they ma y exist. 4. As sume 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? 5. As sume th e company's growth rate slows to the industry average in live years. Wh a future return on eq uity d oe s thi s imply?
In this case. they would like to tr y and increa se the va lue of the co m pa ny's sto ck. Carrington and Genevieve are not sure if th ey should sell the company. What step s can they tak e to tr y and increase the price of th e sto ck? Are there any co nd itions und er which this strategy would not increase the stoc k price?
. Th ey also feel that the company's debt is at a manageabl e level and do not want to borrow more money. If they do not sell the co m pa ny o utright to East Coast Yacht s.Chapter 9
Stock Valu at ion
6. th ey want to retain control of the co mpa ny and do not wan t to sell stock to outside invest ors .