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Homework answers / question archive / You should give the process
You should give the process.) 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. 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. (1) Assuming the company continues its current growth rate, what is the value per share of the company's stock? (2) Carrington and Genevieve want to retain control of 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?
Given information:-
Last year EPS=$5.35
Dividend=$3,20,000 X 2=$6,40,000
Return on Equity=21%
No of shares=150000x2=300000
Return on Equity=[Dividend+Capital appreciation]/Total shareholders fund
or, 21%=[$640000+Capital appreciation]/[300000X$5.35]
or, Capital appreciation=(302950)
or,Capital appreciation=Total shareholders fund at beginning-Total shareholders fund at the end
or, Total shareholders fund at end=(302950)+1605000
or.Total shareholders fund at end=$1302050
Since, the same rate of growth continues, hence return 21% of $1302050 i.e $273430.50
Hence, Total shareholders fund at the end of current year=$1302050+$273430.50
i.e $1575480.50
Therefore, EPS=Total shareholders fund/Number of shares
Value per share=$1575480.50/300000=$5.25
(2) To increase the price of the stock
Step1>>>Dividend should be retain in the Rayn Engines Inc. which would boost capital appreciation of the company.
Step2>>>Increase in capital appreciation means healthy working capital which will boost company's expansion & increased business initiatives.
To conclude, not taking dividend will directly increase the EPS of the company.
Yes, if the siblings takes out dividend out of profits then the stock price would not increase due to decrease in retained earnings.
