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As of December 31, 2009, a company’s assets consisted of $60,000 of cash, $120,000 of marketable...

As of December 31, 2009, a company’s assets consisted of $60,000 of cash, $120,000 of marketable securities, $200,000 of accounts receivable, $300,000 of inventory, and $1,200,000 of net plant and equipment. Its liabilities consisted of $50,000 of accounts payable, $20,000 of accruals, $70,000 of notes payable, and $600,000 of long-term debt. As of December 31, 2010, the company’s assets consisted of $70,000 of cash, $140,000 of marketable securities, $250,000 of accounts receivable, $400,000 of inventory, and $1,300,000 of net plant and equipment. Its liabilities consisted of $65,000 of accounts payable, $15,000 of accruals, $75,000 of notes payable, and $600,000 of long-term debt. In 2010, the company’s annual sales were $4,700,000, earnings before interest and taxes were $800,000, it paid $60,000 of interest, and its tax rate was 30%. The company’s weighted average cost of capital is 11% per year and it has 500,000 shares of common stock outstanding. The company expects its free cash flow to grow forever at a rate of 6% per year. Estimate the value per share of the company’s common stock.

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Expert Solution

Step1: Computation of the net working capital change for the year 2009 & 2010.We have,

Current Asset 2009 2010
Cash 60,000 70,000
Marketable Securities 120,000 140,000
Account Receivable 200,000 250,000
Inventory 300,000 400,000
Total Current Asset 680,000 860,000
Current Liablities:
Account Payable 50,000 65,000
Accruals 20,000 15,000
Note payable 70,000 75,000
Total Current Liabilities 140,000 155,000
Net Working Capital $ 540,000 $ 705,000

Change in Net Working Capital = 705,000 - 540,000 = $ 165,000

Step2: Computation of the capital expenditure in 2010.We have,

Capital expenditure in 2010 = Net plant and equipment in 2010 - Net plant and equipment in 2009

Capital expenditure in 2010 = 1,300,000 - 1,200,000 = $ 100,000

Step3: Computation of the operating free cash flow(OFCF).We have,

OFCF = EBIT(1-tax rate) - Capital expenditure - Change in Working Capital

OFCF = 800,000 (1 - 0.30) - 100,000 - 165,000

OFCF = $ 295,000

Step4: Computation of the value of firm.We have,

If the constant growth rate, the value of the firm is calculating by given formula,

Value of Firm = OFCF / (wacc - g)

Value of Firm = 295,000 / ( 0.11 - 0.06)

Value of Firm = 295,000 / 0.05

Value of Firm = $ 5,900,000

Step5: Computation of the value of Firm per common stock.We have,

Value fo firm per common stock = Value of Firm / Number of outstanding share

Value of firm per common stock = 5,900,000 / 500,000

Value of Firm per common stock = $ 11.80

Hence,the value per share of the company’s common stock is $ 11.80

jeff jeffy answered 2 years ago
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