Question

You are valuing Soda City Inc. It has $132 million of debt, $77 million of cash, and 182 million shares outstanding. You estimate its cost of capital is 9.8%. You forecast that it will generate revenues of $726 million and $774 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 33%, tax rate is 24%, reinvestment rate is 46%, and terminal EV/FCFF exit multiple at the end of year 2 is 11. What is your estimate of its share price? Round to one decimal place. ​[Hint: Compute projected FCFF for years 1 and 2 based on info provided, compute terminal value using the exit multiple method, discount it all to find EV, walk the bridge to Equity, divide by number of shares outstanding.]

Answer 1

Given for Soda City Inc.

forecast that it will generate revenues of $726 million and $774 million over the next two years. Projected operating profit margin is 33%, tax rate is 24%, reinvestment rate is 46%, and terminal EV/FCFF exit multiple at the end of year 2 is 11.

So, EBIT in year 1 = operating profit margin*revenue = 33% of 726 = $239.58 million

FCFF in year 1 = EBIT*(1-t)*(1-reinvestment rate) = 239.58*(1-0.24)*(1-0.46) = $98.32 million

Simmilarly EBIT for year 2 = 33% of 774 = $255.42 million

FCFF in year 2 = 255.42*(1-0.24)*(1-0.46) = $104.82 million

Company's cost of capital Kc = 9.80%

terminal exit value for this company is 11

So, terminal value of the company = 11*104.82 = $1153.07 million

So, enterprise value is PV of FCFF and TV discounted at Kc

So, EV0 = FCFF1/(1+Kc) + FCFF2/(1+Kc)^2 + TV/(1+Kc)^2

EV0 = 98.32/1.098 + 104.82/1.098^2 + 1153.07/1.098^2 = $1132.92 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 1132.92 - 132 + 77 = $1077.92 million

Thus market value of equity = $1077.92 million

So stock price per share = Market value of equity/number of shares = 1077.92/182 = $5.9 per share

So, company stock price today = $5.9 per share.