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Solution CF and Price of Equity

Manufacturing Ltd. projects $145 million in sales next year growing at declining rates to 6% indefinitely. Costs are $81 million and net investment is $15 million growing at the same rates. There are 5.5 million shares outstanding and a required return of 13%. a. The estimated current stock price is $71.54 per share. b. Using an industry PE of 11 instead of discounted cash flows, the estimated stock price is $81.72 per share.

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47 views

Solution CF and Price of Equity

Manufacturing Ltd. projects $145 million in sales next year growing at declining rates to 6% indefinitely. Costs are $81 million and net investment is $15 million growing at the same rates. There are 5.5 million shares outstanding and a required return of 13%. a. The estimated current stock price is $71.54 per share. b. Using an industry PE of 11 instead of discounted cash flows, the estimated stock price is $81.72 per share.

Uploaded by

Snigdha Indurti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Manufacturing Ltd.

has project
expected to be $81 million and
less depreciation) is expected t
following year with the growth
it is expected to remain indefin
require a return of 13% retur
outstanding.

a. What is the estimate of


b. Suppose instead you e
Net Investment 15 $million industry PE multiple is 1
Costs 81 $million
Sales revenue1 145 $million
Shares outstanding 5.5 million
Cost of equity 13%
Tax rate 40%

t 0 1 2 3 4 5
growth rate from t to t+1 14% 12.00% 10.00% 8.00% 6.00%

Sales revenue 145 165.3 185.136 203.6496 219.9416


Costs 81 92.34 103.4208 113.7629 122.8639
EBT 64 72.96 81.7152 89.88672 97.07766
EBT(1-Tax rate) 38.4 43.776 49.02912 53.93203 58.24659
Net Investment 15 17.1 19.152 21.0672 22.75258
1 2 3 4 5
FCFE 23.4 26.676 29.87712 32.86483 35.49402
growth rate from t-1 to t 0.14 0.12 0.1 0.08

TV at t= 5 537.4809

PV of TV 291.7231 $million
PV of planning period CFs ₹ 101.73 $million

Total PV ₹ 393.45 $million

Price per share ₹ 71.54 $ per share

b TV ar t=5 640.7125
TV at t=0 347.7531 $million
Total PV ₹ 449.48 $million
Price per share ₹ 81.72 $ per share
Manufacturing Ltd. has projected sales of $145 million next year. Costs including depreciation are
expected to be $81 million and net investment (incl. working capital investment and capital spending
less depreciation) is expected to be $15million. Each of these values is expected to grow at 14% the
following year with the growth rate declining by 2% per year until the growth rate reaches 6% where
it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding and investors
require a return of 13% return on co.’s stock. The corporate tax rate is 40%. There is no debt
outstanding.

a. What is the estimate of the current stock price?


b. Suppose instead you estimate the terminal value of the company using a PE multiple. The
industry PE multiple is 11. What is the new estimate of co.’s stock price?

6 7
6.00% 6.00%

233.1381 247.1263
130.2357 138.0499
102.9023 109.0765
61.74139 65.44587
24.11773 25.56479
6 7
37.62366 39.88108
0.06 0.06

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