Question

6. You are building a free cash flow to the firm model. You expect sales to grow from $1 billion for the year that just ended to $2 billion five years from now. Assume that the company will not become any more or less efficient in the future. Use the following information to calculate the value of the equity on a per-share basis.

   1. Assume that the company currently has $300 million of net PP&E.

   2. The company currently has $100 million of net working capital.

   3. The company has operating margins of 10 percent and has an effective tax rate of

      28 percent.

   4. The company has a weighted average cost of capital of 9 percent. This is based on a

      capital structure of two-thirds equity and one-third debt.

(SHOW ALL OF WORK PLS)

Answer 1

In order to correctly formulate our worksheet, we must do some preliminary calculations.

First we need to determine a growth rate for sales. It is given that sales were at $ 1 Billion for the year just ended and will be 5 $ after 5 years. To calculate the growth rate, we can solve for (g) in the following equation:

$ 1 Billion * (1+g)⁵ = $ 5 Billion

Divide both sides by $ 1 Billion:

(1+g)⁵ = $ 5

Take the 5th root on both sides:

1+g = 1.379739

g = 1.379739 - 1

g = 37.97 %

Therefore sales are expected to grow at 37.97 % each year.

Further, we are given that the company has an operating margin of 10% and will not become more efficient in the future. Hence, we can assume that the operating margin will remain at 10% till perpetuity.

We know Operating margin = Operating Profit / Sales

= EBIT / Sales

EBIT = 10% * Sales.

Also, since depreciation expenses are not given, we will assume depreciation to be 20% of PPE.

I've solved rest of the question in an Excel Sheet. See Attached Image