Question

In: Finance

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.

Solutions

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

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