Chapter 9, Problem 3MC

Summary Introduction

Case summary: To better integrate its supply chain and get more control over engine features, Larissa has determined that East Coast Yachts should consider buying an engine manufacturer. After looking at several potential businesses, Larissa believes that buying Ragan Engines Inc., is a possibility. She has requested a value assessment of Ragan from Dan Ervin. Carrington and Genevieve Ragan, a brother and sister team who started Ragan Engines Inc. nine years ago and have kept the business privately held. The business produces marine engines for a range of uses. Ragan has grown quickly as a result of proprietary technology that improves the engine’s fuel efficiency with little to any performance loss. Carrington and Genevieve each possess a proportional share of the business. The siblings were each given $150,000$ shares of stock as part of the initial deal. Dan has been asked by Larissa to estimate the price per share of Ragan stock.

Characters in the case: Larissa, Dan, Ragan Engine Inc., Carrington and Genevieve, and Nautilus Marine Engines

Adequate information: Negative earnings per share (EPS) for Nautilus Marine Engines were caused by an accounting write-off from the previous year. EPS for the company would have been $\$2.07$ without the write-off. In the previous year, Ragan had an EPS of $\$5.35$ and distributed $\$320,000$ in dividends to Carrington and Genevieve. The business also earned a $21\%$ return on equity. Larissa informs Dan that an acceptable return for Ragan is $18\%$ .

Dan has analyzed both the financial accounts of the business and those of its rivals. Dan’s analysis shows that, despite Ragan’s current technology edge, its rivals are looking into ways to boost productivity. Dan predicts that Ragan’s technology advantage will disappear within the next five years as a result. The company’s growth would probably decelerate to the industry average after that. Dan also thinks the needed return the business utilizes is too high. He feels that the necessary return set at the industry average is more appropriate.

	EPS	DPS	Stock Price	ROE	R
Blue Ribband Motors Corp.	$\$1.19$	$\$.19$	$\$16.32$	$10.00\%$	$12.00\%$
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	$\$.73$	$\$.44$	$\$18.08$	$1.26$	$15.00\%$

To determine: Industry average price-earnings ratio, Ragan’s price-earnings ratio