Question

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 return on the company's stock. The corporate tax rate is 38 percent. (Do not round intermediate calculations and round your answer to 2 decimal places( e.g. 32.16))

a. What is your estimate of the current stock price?

b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 14. What is your new estimate of the company's stock price?

Answer 1

Solutions:

Cost of Equity(Ke)=14%

Calculation of Earning per share at year1 (EPS1)

Sales =$145.8 million

Less:Cost of sales =$81.40 million

Earning before tax =$64.40 million

Less:Tax@38% =$24.472million

Earning available for equity(a)=$39.928 million

No. of shares(b) =5.9 million

EPS1=a/b

=$39.928 million/5.9 million

=$6.7675

=$6.77

Statement showing EPS

Particulrs	Year1	Year2	Year3	Year4	Year5	Year6
Growth Rate	-	15%	13%	11%	09%	07%
EPS	6.77	7.78	8.79	9.76	10.64	11.38

Now,we have to calculate terminal value at yera end 5(TV4) becuase after year 5 growth rate is constant

TV4=EPS6/(Ke-Growth rate)

=11.38/(.14-.07)

=11.38/.07

=$162.57

Now, we have to calculate the present value of all EPS to know the current stock price

Year	EPS(a)	PVIF@14%(b)	Present Value(a*b)
1	6.77	.877	5.93729
2	7.78	.769	5.98282
3	8.79	.675	5.93325
4	9.76	.592	5.77792
5	10.64	.519	5.52216
TV5	162.57	.519	84.37383
Value of Stock	$113.52727

THus the value of stock is $113.53

B) P/E multiple=Value of share/EPS

thus termianl value at year end 6 using P/E multiple will be

=14*$11.38

=$159.32

Staement showing calculation of value of stock

Year	EPS(a)	PVIF@14%(b)	Present Value(a*b)
1	6.77	.877	5.93729
2	7.78	.769	5.98282
3	8.79	.675	5.93325
4	9.76	.592	5.77792
5	10.64	.519	5.52216
6(TV)	159.32	.456	72.64992
Value of Stock	101.80336

Thus the value of stock is $101.80