Ranger Sports
Ten years ago, in 1999, George Ranger founded small mail order company selling high-quality
sports equipment. Ranger Sports has grown steadily and been consistently profitable (see Table
1). The company has no debt and the equity is valued in the company’s books at nearly Rs.41
crore (Table 2). It is still wholly owned by George Ranger.
George is now proposing to take the company public by the sale of 90,000 of his existing shares.
The issue would not raise any additional cash for the company, but it would allow George to cash
in on part of his investment. It would also make it easier to raise the substantial capital sums that
the firm would later need to finance expansion.
George’s business has been mainly on the East coast of the India, but he plans to expand into the
Central India in 2012. This will require a substantial investment in new warehouse space and
inventory. George is aware that it will take time to build up a new customer base, and in the
meantime there is likely to be a temporary dip in profits. However, if the venture is successful,
the company should be back to its current 12% return on book equity by 2017.
George settled down to estimate what his shares are worth. First, he estimated the profits and
investment through 2017 (Tables 3 and 4). The company’s net working capital includes a growing
proportion of cash and marketable securities which would help to meet the cost of the expansion
into the Central India. Nevertheless, it seemed likely that the company would need to raise about
Rs. 4.30 crores in 2012 by the sale of new shares. (George distrusted banks and is not prepared to
borrow to finance the expansion.)
Until the new venture reached full profitability, dividend payments would have to be restricted to
conserve cash, but from 2017 onwards George expected the company to payout about 40% of its
net profits. As a first step at valuing the company, George assumed that after 2017 it would earn
12% on book equity indefinitely and that the cost of capital for the firm was about 10%. But he
also computed a more conservative valuation, which recognized that the mail-order sports
business was likely to get increasingly competitive. He also looked at the market valuation of a
comparable business on the Western India, Molly Sports. Molly’s shares were currently priced at
50% above book value and were selling on a prospective price-earnings ratio of 12 and a dividend
yield of 3%.
George realized that a second issue of shares in 2012 would dilute his holdings. He set about
calculating the price at which these shares could be issued and the number of shares that would
need to be sold. That allowed him to work out the dividends per share and to check his earlier
valuation by calculating the present value of the stream of per-share dividends.
Table 1
Summary income data (figures in Rs. crores)
2006 2007 2008 2009 2010
Operating Profit
(EBITDA) 5.84 6.40 7.41 8.74 9.39
Depreciation 1.45 1.60 1.75 1.97 2.22
Pre-tax profits 4.38 4.80 5.66 6.77 7.17
Tax 1.53 1.68 1.98 2.37 2.51
After-tax profits 2.85 3.12 3.68 4.40 4.66
Note: Ranger Sports has never paid a dividend and all the earnings have been retained in the business.
Brealey Richard A., and Myers Stewart C., (2000), Chapter 4, The Value of Common Stocks, Principles of
Corporate Finance, 6th Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, pp. 90-91.
Table 2
Summary balance sheet for year ending December 31 st (figures in Rs. crores)
Assets Liabilities and Equity
2009 2010 2009 2010
Cash and securities 3.12 3.61 Current liabilities 2.90 3.20
Other current assets 15.08 16.93
Net fixed Assets 20.75 23.38 Equity 36.05 40.71
Total 38.95 43.92 Total 38.95 43.91
Note: Ranger Sports has 200,000 common shares outstanding, wholly owned by George Ranger.
Table 3
Forecasted profits and dividends (figures in Rs. crores)
2011 2012 2013 2014 2015 2016 2017
Gross profits 10.47 11.87 7.74 8.40 9.95 12.67 15.38
Depreciation 2.40 3.10 3.12 3.17 3.26 3.44 3.68
Pre-tax profits 8.08 8.77 4.62 5.23 6.69 9.23 11.70
Tax 2.83 3.07 1.62 1.83 2.34 3.23 4.09
After-tax profits 5.25 5.70 3.00 3.40 4.35 6.00 7.61
Dividends 2.00 2.00 2.50 2.50 2.50 2.50 3.00
Retained earnings 3.25 3.70 0.50 0.90 1.85 3.50 4.60
Table 4
Forecasted investment expenditures (figures in Rs. crores)
2011 2012 2013 2014 2015 2016 2017
Gross investment in fixed assets 4.26 10.50 3.34 3.65 4.18 5.37 6.28
Investment in net working capital 1.39 0.60 0.28 0.41 0.93 1.57 2.00
Total 5.65 11.10 3.62 4.07 5.11 6.94 8.28
Questions
1. Use Tables 3 and 4 to forecast the free cash flow for Ranger Sports from 2011 to 2017.
What is the PV of these cash flows in 2010, including PV(horizon value) in 2017?
2. Use the information given for Molly Sports to check your forecast of horizon value. What
would you recommend as a reasonable range for the present value of Ranger Sports?
3. What is the Present value of a share of stock in the company? Give a reasonable range.
4. Ranger Sports has to raise Rs. 4.30 crores in 2012. Does this prospective share issue
affect the per-share value of Ranger Sports in 2010? Explain.
Brealey Richard A., and Myers Stewart C., (2000), Chapter 4, The Value of Common Stocks, Principles of
Corporate Finance, 6th Edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, pp. 90-91.
