Question

You are valuing Soda City Inc. It has $107 million of debt, $87 million of cash, and 157 million shares outstanding. You estimate its cost of capital is 12.3%. You forecast that it will generate revenues of $706 million and $794 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 23%, tax rate is 29%, reinvestment rate is 26%, and terminal EV/FCFF exit multiple at the end of year 2 is 14. What is your estimate of its share price? Round to one decimal place.

Answer 1

Given for Soda City Inc.

forecast that it will generate revenues of $706 million and $794 million over the next two years. Projected operating profit margin is 23%, tax rate is 29%, reinvestment rate is 26%, and terminal EV/FCFF exit multiple at the end of year 2 is 14.

So, EBIT in year 1 = operating profit margin*revenue = 23% of 706 = $162.38 million

FCFF in year 1 = EBIT*(1-t)*(1-reinvestment rate) = 162.38*(1-0.29)*(1-0.26) = $85.31 million

Simmilarly EBIT for year 2 = 23% of 794 = $182.62 million

FCFF in year 2 = 182.62*(1-0.29)*(1-0.26) = $95.95 million

Company's cost of capital Kc = 12.30%

terminal exit value for this company is 14

So, terminal value of the company = 14*95.95 = $1343.28 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 = 85.31/1.123 + 95.95/1.123^2 + 1343.28/1.123^2 = $1217.19 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 1217.19 - 107 + 87 = $1197.19 million

Thus market value of equity = $1197.19 million

So stock price per share = Market value of equity/number of shares = 1197.19/157 = $7.6 per share

So, company stock price today = $7.6 per share.