Question

You are valuing S Inc. It has $136 million of debt, $76 million of cash, and 186 million shares outstanding. You estimate its cost of capital is 9.4%. You forecast that it will generate revenues of $729 million and $771 million over the next two years. Projected operating profit margin is 34%, tax rate is 23%, reinvestment rate is 49%, and terminal exit value multiple at the end of year 2 is 10. What is your estimate of its share price? Round to one decimal place. [Hint: Compute projected FCFF for years 1 and 2 based on info provided, compute terminal value using the exit multiple method, discount it all to find EV, walk the bridge to Equity, divide by number of shares outstanding.

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ million, except price per share which is in $.

Year, n	Linkage	1	2
Revenue	A	729.00	771.00
Projected operating profit margin	B	34%	34%
EBIT	C = A x B	247.86	262.14
Tax rate	D	23%	23%
Reinvestment rate	E	49%	49%
FCF	F = C x (1 - D) x (1 - E)	97.33	102.94
Terminal exit value multiple	G		10.00
Exit value	H = F of year 2 x G		1,029.42
Discount rate	I	9.40%
Discount factor	J = (1 + I)^(-n)	0.9141	0.8355
PV of FCF	K = F x J	88.97	86.01
PV of exit value	L = H x J		860.12
Value of the firm	M = Sum of all K + L	1,035.10
[-] Debt	N	136.00
[+] Cash	O	76.00
Value of the equity	P = M - N + O	975.10
Number of shares (million)	Q	186.00
Estimated share price ($)	P / Q	5.24