Question

In: Finance

Nextbig Corp. currently has sales of $870 million; sales are expected to grow by​ 26% next...

Nextbig Corp. currently has sales of $870 million; sales are expected to grow by​ 26% next year​ (year 1). For the year after next​ (year 2), the growth rate in sales is expected to equal​ 13%. Over each of the next 2​ years, the company is expected to have a net profit margin of 11​% and a payout ratio of 55​%, and to maintain the common stock outstanding at 25.85 million shares. The stock always trades at a​ P/E of 16.43 times​ earnings, and the investor has a required rate of return of 18​%. Given this​ information:

a. Find the​ stock's intrinsic value​ (its justified​ price).

b. Use the IRR approach to determine the​ stock's expected​ return, given that it is currently trading at ​$51.00 per share.

c. Find the holding period returns for this stock for year 1 and for year 2.

Solutions

Expert Solution

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. Figures in parenthesis, if any, mean negative values. All financials are in $ million; nos. of shares are in million and per share data like EPS, DPS, price are in $.

Parameter Linkage 0 1 2
Sales A        870.00 1,096.20     1,238.71
y-o-y growth 26% 13%
Net profit margin B 11% 11%
Net profit C = A x B       120.58        136.26
Payout ratio D 55% 55%
Dividends E = C x D         66.32           74.94
Number of shares outstanding F 25.85 25.85 25.85
EPS G = C / F           4.66             5.27
P/E Multiple H 16.43 16.43
Price per share I = G x H         76.64           86.60
Dividend per share J = E / F           2.57             2.90

a. Find the​ stock's intrinsic value​ (its justified​ price).

Intrisic value = PV of all dividends + PV of terminal value = D1/(1 + r) + D2 / (1 + r) + P2 / (1 + r)2 = 2.57 / (1 + 18%) + 2.90 / (1 + 18%)2 + 86.60 / (1 + 18%)2 = $ 66.45 / share

b. Use the IRR approach to determine the​ stock's expected​ return, given that it is currently trading at ​$51.00 per share.

Please see the table below. IRR = 35.01%

c. Find the holding period returns for this stock for year 1 and for year 2.

HPR1 = (P1 + D1) / P0 - 1 = (76.64 + 2.57) / 51 - 1 = 55.31%

HPR2 = (P2 + D2) / P1 - 1 = (86.60 + 2.90) / 76.64 - 1 = 16.78%

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

ABC Company currently has sales of $250 million. The company's sales are expected to grow 20%...
ABC Company currently has sales of $250 million. The company's sales are expected to grow 20% next year (year 1) and 10% during year 2. The analyst expects the company to have a net profit margin of 8% each year, a dividend payout ratio of 50%, 15 million shares of common stock outstanding over the time horizon, and sell for a p/e ratio of 15 at the end of year 2. If the required rate of return is 20%, then...
(26) CCC currently has sales of $28,000,000 and projects sales of $39,200,000 for next year. The...
(26) CCC currently has sales of $28,000,000 and projects sales of $39,200,000 for next year. The firm's current assets equal $7,000,000 while its fixed assets are $6,000,000. The best estimate is that current assets will rise directly with sales while fixed assets will rise by $300,000. The firm presently has $3,500,000 in accounts payable, $2,100,000 in long-term debt, and $7,400,000 in common equity. All current liabilities are expected to change directly with sales. CCC plans to pay $1,000,000 in dividends...
Piedomont Products LTD (PPL) has current sales of $60 million. sales are expected to grow to...
Piedomont Products LTD (PPL) has current sales of $60 million. sales are expected to grow to $80 million next year. PPL currently has accounts receivables of $9 million, inventories of $15 million and net fixed assets of $24 million. These assets are expected to grow at the same rate as sales over the next year. Accounts payable are expected to increase from their current level of $15 million to a new level of $19 million next year. PPL wants to...
A) Cathey Corporation currently has sales of $1,200, which are expected to grow by 10% from...
A) Cathey Corporation currently has sales of $1,200, which are expected to grow by 10% from Year 0 to Year 1 and by 4% from Year 1 to Year 2. The company currently has an operating profitability ratio (OP) of 7% and a capital requirement ratio (CR) of 50% and expects to maintain these ratios at their current levels. The current level of total net operating capital (OpCap) is $550. Use these inputs to forecast free cash flow (FCF) for...
Global Corp. expects sales to grow by 7 % next year. Using the percent of sales...
Global Corp. expects sales to grow by 7 % next year. Using the percent of sales method and the data provided in the given tables​, ​forecast: a. Costs except depreciation b. Depreciation c. Net income d. Cash e. Accounts receivable f. Inventory g.​ Property, plant, and equipment h. Accounts payable ​(​Note: Interest expense will not change with a change in sales. Tax rate is 26%.) Income Statement​ ($ million) Balance Sheet​ ($ million) Net Sales 185.4185.4 Assets Costs Except Depreciation...
1. Ogier Incorporated currently has $900 million in sales, which are projected to grow by 8%...
1. Ogier Incorporated currently has $900 million in sales, which are projected to grow by 8% in Year 1 and by 4% in Year 2. Its operating profitability (OP) is 7%, and its capital requirement (CR) is 65%. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to two decimal places. What are the projected sales in Years 1 and 2 (in...
Assume that current sales are $30 million, and are expected to grow by 12% in year...
Assume that current sales are $30 million, and are expected to grow by 12% in year 1 and 2. The after-tax profit margin is projected at 8% in year 1, and 9.2% in year 2. The number of shares outstanding is anticipated to be 450,000 for year 1, and 500,000 for year 2. Calculate the projected earnings per share for the next two years.
Ambrose Motor Corp. has expected cash flow for the next year equal to $ 1 million...
Ambrose Motor Corp. has expected cash flow for the next year equal to $ 1 million if it does not lose a product liability lawsuit and $0 if it loses the lawsuit. The CEO would work for $100,000 if he were certain to receive his promised compensation. However, if there is uncertainty for his compensation, he will work for the company only if the company pays him $125,000. The probability of the lawsuit is 90%. Now suppose that Ambrose Motor...
Full Boat Manufacturing has projected sales of $122.5 million next year. Costs are expected to be...
Full Boat Manufacturing has projected sales of $122.5 million next year. Costs are expected to be $72.8 million and net investment is expected to be $14.4 million. Each of these values is expected to grow at 12 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 4 percent, where it is expected to remain indefinitely. There are 6.2 million shares of stock outstanding and investors require a return of 11...
Eberhart Manufacturing has projected sales of $145.8 million next year. Costs are expected to be $81.4...
Eberhart Manufacturing has projected sales of $145.8 million next year. Costs are expected to be $81.4 million and net investment is expected to be $15.4 million. Each of these valued is expected to grow at 15 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 7 percent, where it is expected to remain indefinitely. There are 5.9 million shares of stock outstanding and investors require a return of 14 percent...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT