Suppose Company A has revenue $45 million this year and we assume that its future performance...

Suppose Company A has revenue $45 million this year and we assume that its future performance will be tracked relative to sales as follows:

Sales growth and the net profit margin are projected by year as shown in the following table:

year	1	2	3	4	5	6
Sales growth	35%	28%	24%	20%	15%	6%
Net profit margin	10.0%	9.0%	8.0%	7.0%	6.5%	6.0%
The growth rate will maintain at 6% after year 6

Fixed capital investment net of depreciation is projected to be 25% of the sales increase in each year.

Working capital requirements are 8.0% of the projected dollar increase sales in each year. Debt will finance 30% of the investments in net capital and working capital.
Risk free rate is 3%, beta equity is 1.1, and market return is 7%
Calculate the value of the equity of this company.

Expert Solution

Cost of Equity=

3%+(1.1*(7%-3%))=

7.4%

	0	1	2	3	4	5	6	Terminal Value
Sales	45	60.75	77.76	96.42	115.71	133.06	141.05	10679.50
Increase in sales,over the previous yr.		15.75	17.01	18.66	19.28	17.36	7.98	10538.453
Fixed capital inv.(25%*sales increase)-----a		3.93750	4.25250	4.66560	4.82112	4.33901	1.99594	2634.613
W/C req.(8%*Inc.in sales)-----------------b		1.26000	1.36080	1.49299	1.54276	1.38848	0.63870	843.076
Total assets		5.19750	5.61330	6.15859	6.36388	5.72749	2.63465	3477.690

Debt (30%*(a+b))------------------------c		1.55925	1.68399	1.84758	1.90916	1.71825	0.79039	1043.307
Bal. 70% by equity----------------(a+b)-c		3.63825	3.92931	4.31101	4.45471	4.00924	1.84425	2434.383
PV F at 7.4% cost of equity		0.93110	0.86694	0.80721	0.75159	0.69981	0.65159	0.652
PV at 7.4%		3.38757	3.40649	3.47990	3.34813	2.80570	1.20170	1586.219
Total Value of equity	1603.85


Terminal Value=
(141.05*1.06)/(0.074-0.06)= 10679.50

jeff jeffy answered 3 years ago

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