Question

You are trying to value ListoFact, a data processing company. The company generated $ 1 billion in revenues in the most recent financial year and expects revenues to grow 3% a year in perpetuity. It generated $ 30 million in after-tax operating income in the most recent financial year and expects after-tax operating margin to double over the next 3 years (in equal annual increments ). After year 3, the margin will stabilize at year 3 levels forever. The firm is expected to have depreciation of $ 20 million and capital expenditures of $15 million each year for the next 3 years and to earn a 10% return on capital in perpetuity after that. There are no working capital requirements. The cost of capital will be 12% for the next 3 years and 10% thereafter. a. Estimate the free cashflows to the firm each year for the next 3 years. b. Estimate the value of the firm at the end of the third year (terminal value) c. Estimate the value of equity per share today, if the firm has $ 150 million in debt outstanding, $ 25 million as a cash balance and 10 million shares

Answer 1

	Details	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Sales with 3% growth rate	$       1,000,000,000	$    1,030,000,000	$      1,060,900,000	$     1,092,727,000	$      1,125,508,810	$     1,159,274,074	$            1,194,052,297
	After Tax operating Margin	3%	4%	5%	6%	6%	6%	6%
a	After Tax operating Margin $		$         41,200,000	$            53,045,000	$          65,563,620	$            67,530,529	$          69,556,444	$                  71,643,138
b	Add : Depreciation		20,000,000	20,000,000	20,000,000	0	0	0
c	Less : Capital Expenditure		15,000,000	15,000,000	15,000,000	-	-	-
d	Free Cash Flow=a+b-c		$         46,200,000	$            58,045,000	$          70,563,620	$            67,530,529	$          69,556,444	$                  71,643,138
e	FCF Growth Rate		26%	22%	-4%	3%	3%

	So FCF growth Rate from Year 4 is g=3%
	Let Us find the Enterprise value of ListoFact
	Details	Year 1	Year 2	Year 3
	Free Cash flow	$            46,200,000	$         58,045,000	$            70,563,620
	PV factor @ Cost of Capital 12%	0.8929	0.7972	0.7118
	PV of FCF for first 3 years	$            41,251,980	$         46,273,474	$            50,227,185
f	Sum of PV of FCF for fisrt 3 years =	$          137,752,639

	Terminal Value of FCF at Year 3
	Growth rate =g=3%
	Cost of Capital from Yr 4=10%
	So Terminal Value of FCF at Yr3=67530529/(10%-3%)=		$ 964,721,837.14
	Cost of Capital till Yr 3=12%
g	So PV of Terminal Value =$964,721,837.14/(1.12)^3=		$ 686,669,948.31
h	Now Enterprixe value of ListoFact=f+g=	$    824,422,587.03
i	Outstanding Debt =	$          150,000,000
j	Cash balance =	$      25,000,000.00
k	Market Value of Equity=EV-Debt+Cash=h-i+j=	$    699,422,587.03
l	No of Common Stock outstanding =	10,000,000
m	Value of Equity share =k/l=	$                      69.94