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Orange Juice Technologies (OJ-Tech) earned $81.2 million in net income on $644 million in sales in...

Orange Juice Technologies (OJ-Tech) earned $81.2 million in net income on $644 million in sales in the year that ended 12/31/2017. From the income statement you see that the operating profit in 2017 was $138.0 million. From the cash flow statement, capital expenditures were $62 million, depreciation expense was $74 million, and net working capital increased by $6 million in 2017.

OJ-Tech estimates their corporate WACC as 6.5%, and their average tax rate is 25%. Sales, income and free cash flow are expected to grow at a rate of 2% in 2018 and will continue to grow at that rate forever.

Book value of all debt is equal to $448 million, and the book value of equity is $927 million. There are currently 124.2 million common shares outstanding. The cash balance is $151 million.

a) Compute Free Cash Flow for 2017

b) Estimate the Enterprise Value of OJT as of 12/31/2017.

c) Compute the value of one share of common stock on 12/31/2017

d) Compute the price-to-book value ratio for OJT on 12/31/2017.

Expert Solution

a) Company's free cash flow for the year 2017:

Free cash flow is the assessment of the amount of cash which is generated by the company after all its capital expenditures.

Free cash flow= EBIT(1-tax) + Depreciation - change in net working capital - Capital expenses.

= ($138-74)(1-0.25) +$74 - $6 - $62

= $54million

# EBIT = Operating income - depreciation

b) Enterprise Value of OJT as of 12/31/2017

Free cash flow in next year = $54 + 2% = $55.08million

hence,

= $1224.million

c) Value of one share of common stock:

Value of equity = enterprise value - total debt valu

hence, value of equity = $1224 - $448 =$776million

number of outstanding shares = 124.2 million

hence value of one share = value of equity / outstanding shares

= $776/124.2

=$6.25 per share

d) price to book value ratio:

=0.84 times

jeff jeffy answered 2 years ago

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