Question

Progressive Studios​ Corporation’s sales in Year 2019 is 800 million dollars.​ Let’s make the following assumptions on the​ firm’s performance to forecast its free cash flow in Year​ 2020:

​• Sales grow​ 25% from Year 2019 to Year 2020.

​• Corporate tax rate is​ 25%.

​• COGS is​ 40% of the sales in Year 2020.

​• SG&A is​ 20% of the sales in Year 2020.

​• Depreciation is​ 10% of the sales in Year 2020.

​• Net working capital amounts to​ 30% of the sales for each year​ (i.e., NWC for 2019 is​ 30% sales in​ 2019, NWC for 2020 is prediced to be​ 30% sales in​ 2020).

​• Capital expenditure is​ 5% of the sales in Year 2020.

a. What is the forcasted EBIT of Progressive Studios Corporation in Year​ 2020? Progressive Studios ​Corporation’s forecasted EBIT in Year 2020 is $___.(Round to the nearest​ dollar.)

b. What is Progressive Studios ​Corporation’s forecasted free cash flow in Year​ 2020? Progressive Studios ​Corporation’s forecasted free cash flow in Year 2020 is ​$___.​(Round to the nearest​ dollar.)

c. Assume that starting from Year 2021 and​ beyond, Progressive​ Studios' free cash flow will grow​ 2% per year. The weighted average cost of capital is ​ 12%. The corporation has debt outstanding of​ $100 million and cash of​ $50 million in Year 2019. The number of shares outstanding is 100 million shares. What is the price of Progressive Studios stock will be consistent with the​ forecast? The price per share of $___ will be consistent with the forecast

Answer 1

Particulars	2020
Sales with growth @ 25% = 800*(1.25) =	1000
COGS = 40%*1000 =	400
SG&A = 20%*1000 =	200
Depreciation = 10%*1000 =	100
NWC = 30%*100 =	300
Capital expenditure = 5%*1000 =	50

a)

Sales	1000
-COGS	400
-SG&A	200
-Depericiation	100
=Earning before interest and tax	=300

b)

Net operating income after tax = EBIT *(1-tax) = 300*(1-0.25) =	225
+ Depericiation =	100
- Capital expenditure	50
+ NWC	300
Free cash flow (FCF) =	=575

c) Enterprise value = FCF/ (W-G) (from DCF method)

W= Weighted average cost of capital = 12%

G =Growtg rate = 2%

Enterprise value = 575/ (12%-2%) 5750

Enterprise value = Value of equity+ value of debt -cash

Thus, value of equity = 5750- 100 +50 = 5700

Price per share = Value of equity / Number of shares =5700 / 100 = $57/share