In: Finance
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.
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 |