The Churgin Corp. had sales of $310 million this year, costs were $185 million and net...

The Churgin Corp. had sales of $310 million this year, costs were $185 million and net investment was $55 million. Each of these values is project to grow at 10% per year for the next 5 years, afterwards these values will grow at 4% indefinitely. There are 10.25 million shares outstanding and investors require a 9% rate of return on their investment. The corporate tax rate is 25%. Use the growing perpetuity formula to estimate the terminal value, then calculate the present value as of today of the terminal value. (Enter the value in millions, e.g. 90 implies 90 million; round to 2 decimals)

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Expert Solution

Sales in 6th year = current sales*(1+growth rate)^{no. of
years} = $310*(1+0.10)⁵ = $310*1.10⁵ = $310*1.61051‬ = $499.26

Costs in 6th year = current costs*(1+growth rate)^{no. of
years} = $185*(1+0.10)⁵ = $185*1.10⁵ = $185*1.61051‬ = $297.94

Net investment in 6th year = current net investment*(1+growth rate)^{no. of years} = $55*(1+0.10)⁵ = $55*1.10⁵ = $55*1.61051‬ = $88.58

Free cash flow to firm in 6th year = [(sales - cost)*(1-tax rate)] - net investments = [($499.26 - $297.94)*(1-0.25)] - $88.58 = ($201.32*0.75) - $88.58 = $150.99 - $88.58 = $62.41

growing perpetuity formula to estimate the terminal value:

terminal value in 6th year = [free cash flow to firm in 6th year*(1+perpetual growth rate)]/(required return - perpetual growth rate)

terminal value in 6th year = [($62.41*(1+0.04)]/(0.09-0.04) = ($62.41*1.04)/0.05 = $64.9064/0.05 = $1,298.128

Present value of terminal value as of today = ‬terminal value in 6th year/(1+ required return)^{no. of years} = $1,298.128/(1+0.09)⁵ = $1,298.128/1.09⁵ = $1,298.128/1.5386239549 = $843.69

Present value of terminal value as of today is $843.69.

jeff jeffy answered 1 year ago

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