Question

We want to estimate the value of Lululemon (LULU). The estimated required return is 9% and the free cash flow is $145 million and expected to grow at 8% each year for the next 2 years and then at a constant growth rate of 2.5%. The outstanding debt is $700 million, the number of shares of common stock is 18 million, and preferred stock is currently trading at $65 per share and there are 15 million shares outstanding. What is the estimated stock price today? Answer not using Excel

Answer 1

The price is computed as follows:

= FCF in year 1 / (1 + required return)¹ + FCF in year 2 / (1 + required return)² + 1 / (1 + required return)² x [ (FCF in year 2 x (1 + growth rate) / (rate of return - growth rate) ]

= ($ 145 million x 1.08) / 1.09 + ($ 145 million x 1.08²) / 1.09² + 1 / 1.09² x [ ($ 145 million x 1.08² x 1.025) / (0.09 - 0.025) ]

= $ 156.6 million / 1.09 + $ 169.128 million / 1.09² + 1 / 1.09² x [ ($ 173.3562 million / 0.065) ]

= $ 156.6 million / 1.09 + $ 169.128 million / 1.09² + $ 2,667.018462 million / 1.09²   

= $ 156.6 million / 1.09 + $ 2,836.146462 million / 1.09²

= $ 2,530.79746 million

So, the price per share will be:

= ($ 2,530.79746 million - Amount of debt - Number of preference shares x price per share) / Number of common shares outstanding

= ($ 2,530.79746 million - $ 700 million - 15 million x $ 65) / 18 million shares

= ($ 2,530.79746 million - $ 700 million - 975 million) / 18 million shares

= $ 855.7974598 million / 18 million shares

= $ 47.54 Approximately

Please ask in case of any doubts