Nautilus Marine Engine'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%. Larissa tells Dan that a required return for Ragan of 18% is appropriate.
1.) Assuming the company continues its current growth rate, what is the value per share of the company's stock?
2.) Dan has examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently has a technological advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will last for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumption, what is the estimated stock price?
3.) What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist.
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?
5.) Assume the company growth rate slows to the industry average in five years. What future return on equity does this imply?
6.) Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company outright to East Coast yachts, they would like to try and increase the value of the company's stock. They want to retain the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. What steps can they take to try and increase the price of the stock? Are there any conditions under which this strategy would not increase the stock price?
Blue Ribband Motors Corp- EPS=$1.09 DPS=$.19 Stock Price=$16.32 ROE=10.00% R=12.00%
Bon Voyage Marine Inc.- EPS=1.26 DPS=.55 Stock Price=13.94 ROE=12.00% R=17.00%
Nautilus Marine Engines- EPS=(.27) DPS=.57 Stock Price=23.97 ROE=N/A R=16.00%
Industry Average- EPS=$.73 DPS=$.44 Stock Price=$18.08 ROE=11.00% R=15.00%