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CASE 2
Ryan International
In the world of skateboard attire, instinct and marketing savvy are prerequisites to success.
Moogy Ellis had both. During 2013, his international skateboarding company, Ryan, rocketed to
$900 million in sales after 10 years in business. His fashion line covered the skateboarders from
head to toe with hats, shirts, pants, shorts, sweatshirts, socks, and shoes. In L.A., there was a
Ryan shop every five or six blocks, each featuring a different color. Some shops showed the
entire line in mauve, and others featured it in canary yellow.
Ryan had made it. The company’s historical growth was so spectacular that no one could
have predicted it. However, securities analysts speculated that Ryan could not keep up the pace.
They warned that competition is fierce in the fad fashion industry and that the firm might
encounter little or no growth in the future. They estimated that stockholders also should expect
no growth in future dividends.
Contrary to the conservative securities analysts, Moogy Ellis feels that the company could
maintain a constant annual growth rate in dividends per share of 9.5% in the future, or possibly
13% for the next 2 years and 9.5% thereafter. Ellis based his estimates on an established longterm expansion plan into European and Latin American markets. Venturing into these markets
was expected to cause the risk of the firm, as measured by the beta on its stock, to increase
immediately from 1.1 to 1.25.
In preparing the long-term financial plan, Ryan’s chief financial officer has assigned a junior
financial analyst, Brad Harris, to evaluate the firm’s current stock price. He has asked Brad to
consider the conservative predictions of the securities analysts and the aggressive predictions of
the company founder, Moogy Ellis.
Mark has compiled these 2013 financial data to aid his analysis:
Data item
2013 value
Earnings per share (EPS)
$4.13
Price per share of common stock
$39.00
Book value of common stock equity
$60,000,000
Total common shares outstanding
3,000,000
Common stock dividend per share
$2.05
Data Points
Beta, b
Required Return, K
0
4.5%
.25
6.75%
.5
9%
.75
11.25%
1
13.5%
1.25
15.75%
1.5
18%
To Do
a. What is the firm’s current book value per share?
Answer a.
Current Boom Value per Share
= Book value of common stock equity / Total common shares outstanding
= 60,000,000 / 3,000,000
= $ 20 per Share
b. What is the firm’s current P/E ratio?
Answer b
P/E Ratio = Market Price per Share / Earnings per Share
= $ 39 / $ 4.13
= 9.44
c. (1) What is the current required return for Ryan stock (use CAPM)?
Answer c (1)
For Finding Required Rate of Return for Beta at 1.1, we got 14.4 % required return by
interpolation.
CAPM
= Risk Free Return + Beta of Firm ( Market Return – Risk free Return )
= 0.045 + 1.1 ( 0.144 – 0.045 )
= 0.1539
or 15.39 %
(2)What will be the new required return for Ryan stock assuming that they expand into
European and Latin American markets as planned (use CAPM)?
Answer c(2)
CAPM
= Risk Free Return + Beta of Firm ( Market Return – Risk free Return )
= 0.045 + 1.25 ( 0.1575 – 0.045 )
= 0.185625
0r 18.5625 %
d. If the securities analysts are correct and there is no growth in future dividends, what will be
the value per share of the Ryan stock? (Note: use the new required return on the company’s
stock here)
Answer d.
Stock Value = Dividend per Share / Required Rate of Return
= 2.05 / 0.185625
= $ 11.04
e. (1) If Moogy Ellis’s predictions are correct, what will be the value per share of Ryan’s stock
if the firm maintains a constant annual 9.5% growth rate in future dividends? (Note:
Continue to use the new required return here.)
Answer e(1)
Stock Value = ( Dividend last paid * Growth rate ) / ( Required rate of return – Growth rate )
= ( 2.05 * 1.095 ) / ( 0.185625 – 0.095 )
= 2.24475 / 0.090625
= $ 24.77 per Share
(2) If Moogy Ellis’s predictions are correct, what will be the value per share of Ryan’s stock
if the firm maintains a constant annual 13% growth rate in dividends per share over the
next 2 years and 9.5% thereafter? (Note: Use the new required return here.)
Answer e(2)
Stock Value = {(2.05)*(1.13)/(1.185625)} + {(2.05)*(1.13)^2 / (1.185625)^2} +
{(2.05)*(1.13)^2*(1.095) / (0.185625-0.095)}
= 1.95 + 1.86 + 31.63
= $ 35.44
f. Compare the current (2013) price of the stock and the stock values found in parts a, d, and e.
Discuss why these values may differ. Which valuation method do you believe most clearly
represents the true value of the Ryan stock?
Based on the answers from A,D & E it can easily be inferred that present stock price in
market is Overvalued.
Moreover the values may differ as there is no exact happening of event in future as
predicted by Ryan.
There is no particular method that clearly represents the Ryan’s Stock because each
method is different with different assumptions. Each method suggest different value
based on different criteria.