Question

10.

You are valuing Soda City Inc. It has $150 million of debt, $70 million of cash, and 200 million shares outstanding. You estimate its cost of capital is 8.0%. You forecast that it will generate revenues of $740 million and $760 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 40%, tax rate is 20%, reinvestment rate is 60%, and terminal EV/FCFF exit multiple at the end of year 2 is 8. What is your estimate of its share price? Round to one decimal place.

Answer 1

Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays its costs of doing business, invests in short-term assets like inventory, and invests in long-term assets like property, plants and equipment.

Steps

• Find Net Profit using the margins and taxes.
• Find FCFF after deducting reinvested portion
• Find Terminal value end of year 2 after taking multiple of 8 on 2nd year FCFF
• Add up fuind total FCFF
• Discount each FCFF using discount rate of 8%
• Find present value add it to find the value of the firm
• Then add cash less debt to find value of equity
• Divide by no of shares to find price per share.

Particulars		1	2
Sales		740	760
Operating Profit	40% Sales	296	304
Taxes	20% Profit	-59	-61
Net Profit		237	243
Reinvested	60%	-142	-146
Free Cash Flow		95	97
Terminal Value	8 Times of Year 2		778
Total Value		95	876
Discount Factor	`@ 8% Cost	0.93	0.86
Present Value		88	751
Value of Firm	838
Add Cash	70
Less Debt	-150
Equity Value	758
No of Shares	200
Value Per Share	3.79