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The Churgin Corp. had sales of $310 million this year, costs were $185 million and net...

The Churgin Corp. had sales of $310 million this year, costs were $185 million and net investment was $55 million. Each of these values is project to grow at 10% per year for the next 5 years, afterwards these values will grow at 4% indefinitely. There are 10.25 million shares outstanding and investors require a 9% rate of return on their investment. The corporate tax rate is 25%. Use the growing perpetuity formula to estimate the terminal value, calculate the current price per share of stock. (Round to 2 decimals)

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Expert Solution

FCFF = (sales-costs)*(1-tax rate)-capex = (310-185)*(1-0.25)-55=38.75m

WACC= 9.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 38.75 10.00% 42.625 42.625 1.09 39.1055
2 42.625 10.00% 46.8875 46.8875 1.1881 39.46427
3 46.8875 10.00% 51.57625 51.57625 1.295029 39.82633
4 51.57625 10.00% 56.733875 56.733875 1.41158161 40.19171
5 56.733875 10.00% 62.4072625 1298.071 1360.478263 1.538623955 884.21752
Long term growth rate (given)= 4.00% Value of Enterprise = Sum of discounted value = 1042.81

Terminal value = 1298.071 m

Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Stock price = enterprise value/number of shares = 1042.81/10.25=101.74

jeff jeffy answered 9 months ago
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