Question

An analyst is trying to value Jason’s Specialties (JS) stock. The analyst has collected data from the company and other sources to prepare the below financials, both actual and projected. Based upon these sources, the analyst expects the company’s free cash flows to grow at 4% on average. The analyst has estimated the company’s cost of capital (WACC) to be 16% and its cost of equity to be 21%. The risk-free rate is 2.3%..

1. Compute the firm’s FCF (free cash flow) for year 2020.
2. Find the value of the firm using DCF method and price per share assuming that there are 10,000,000 shares issued and outstanding..

Income statement for the fiscal year ending January 1 (Millions of dollars)

2019 (Actual)		2020 (Projected)
Net Sales	$400.0		$430.0
Costs	260.0		283.5
Depreciation	37.5		42.5
Earnings before interest and taxes	102.5		104.0
Interest expense	14.1		16.0
Earnings before taxes	88.4		89.9
Taxes (40%)	35.36		35.2
Net income before preferred dividends	53.04		52.8
Preferred dividends	6.0		6.5
Net income	47.04		46.3
Common dividends	37.632		38.2
Addition to retained earnings	9.0408		8.1

Balance sheets for the fiscal year ending January 1 (Millions of dollars)

2019 (Actual)		2020 (Projected)
Cash	$6.3		$3.6
Marketable Securities	40.9		39.128
Accounts Receivable	62.0		67.0
Inventories	107.0		105.5
Net plant & equipment	391.0		415.36
Total Assets	607.2		630.58
Accounts payable	9.6		12.1
Accruals	25.5		29.1
Long-term bonds	210.7		217.78
Preferred Stock	55		57.1
Common Stock (Par plus PIC)	160.0		160.0
Retained earnings	146.4		154.5
Total Liabilities & Equity	607.2		630.58

Answer 1

Ans : Free Cash flow to the firm for 2020 :

	Particulars	Amount
	Net Income	52.8
Add	Interest expense	16
Less	Tax shield on interest expense ( Interest exp * tax rate)	6.4
Add	Non Cash exp( dep)	42.5
Less	Change in working capital	-7.072
Less	Capital expenditure	24.36
	Free Cash Flow	$87.612 million

Working :

Changes in working capital = Projected working capital - previous year working capital

= 174.028-181.1 = - $7.072million

Working capital of 2019 = Current assets - current liabilities

= (6.3 + 40.9 + 62 + 107) - ( 9.6 + 25.5)

= 216.2 - 35.1

= $181.1million

Working Capital 2020 = (3.6 +39.128+67+105.5) - (12.1+29.1)

= 215.228 - 41.2

=$174.028 million

Change in capital expenditure = Projected year fixed asset - current year fixed asset

=415.36-391

=$24.36 million

Value of the firm using DCF Method = Cash Flow /(Discount rate - growth rate of cash flow )

= 87.612/(0.16-0.04)

=$730.1 million

Here, WACC is considered as discount rate. Discount rate is cost of capital

Price/Share = value of firm/ No. of shares outstanding

=$730.1million/10million = $73.01/share