Question

You are valuing Soda City Inc. It has $104 million of debt, $89 million of cash, and 154 million shares outstanding. You estimate its cost of capital is 12.6%. You forecast that it will generate revenues of $703 million and $797 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 21%, tax rate is 29%, reinvestment rate is 23%, and terminal EV/FCFF exit multiple at the end of year 2 is 15. What is your estimate of its share price? Round to one decimal place.

Answer 1

Cost of Capital = 12.6% | Revenue in First Year = $703 million | Revenue in Second Year = $797 million

Operating Profit Margin = 21% | Tax rate = 29% | Reinvestment rate = 23%

Terminal EV/FCFF Exit Multiple at Year 2 = 15

First, we will calculate the Net Operating Profit After Tax for Year 1 and Year 2.

Operating Profit at Year 1 = Revenue in Year 1 * Operating Profit margin = 703 million * 21% = $147.63 million

Net Opearting Profit After Tax or NOPAT at Year 1 = Operating Profit * (1 - Tax rate) = 147.63 million * (1 - 29%)

Net Opearting Profit After Tax or NOPAT at Year 1 = $104,817,300

Operating Profit at Year 2 = Revenue in Year 2 * Operating Profit margin = 797 million * 21% = $167.37 million

Net Opearting Profit After Tax or NOPAT at Year 2 = 167.37 million * (1 - 29%)

Net Opearting Profit After Tax or NOPAT at Year 2 = $118,832,700

Now we will calculate the Free Cashflow to Firm using the NOPAT and Reinvestment rate.

FCFF at Year 1 = NOPAT Year 1 * (1 - Reinvestment rate) = 104,817,300 * (1 - 23%)

FCFF at Year 1 = $ 80,709,321

FCFF at Year 2 = NOPAT Year 2 * (1 - Reinvestment rate) = 118,832,700 * (1 - 23%)

FCFF at Year 2 = $ 91,501,179

Using the FCFF at Year 2 and EV / FCFF Exit multiple for Year 2, we can calculate the Terminal EV at Year 2.

Terminal EV / FCFF Exit multiple at Year 2 = 15

Terminal EV at Year 2 = 15 * FCFF at Year 2

Terminal EV at Year 2 = 15 * 91,501,179

Terminal EV at Year 2 = $ 1,372,517,685

Now we have all the Cashflows, hence, we can use Cost of Capital of 12.6% to calculate the Enterprise Value of the company at Year 0.

Enterprise Value at Year 0 = FCFF at Year 1 / (1 + Cost of Capital) + FCFF at Year 2 / (1+Cost of Capital)² + Terminal EV at Year 2 / (1+Cost of Capital)²

Enterprise Value at Year 0 = 80,709,321 / (1+12.6%) + 91,501,179 / (1+12.6%)² + 1,372,517,685 / (1+12.6%)²

Enterprise Value at Year 0 = 71,677,904.97 + 72,168,870.62 + 1,082,533,059.23

Enterprise Value of the Company today = $1,226,379,834.82

Debt = $104,000,000 | Cash = $89,000,000

Enterprise Value = Value of Equity + Debt + Cash

Rearranging for Value of Equity

Value of Equity = Enterprise Value - Debt - Cash

Value of Equity of the company = 1,226,379,834.82 - 104,000,000 - 89,000,000

Value of Equity of the company = $1,033,379,834.82

Shares outstanding = 154,000,000

Value per share = Value of Equity of the company / Shares Outstanding

Value per share = 1,033,379,834.82 / 154,000,000

Value per share of the company = $ 6.71 or $ 6.7

Hence, Estimated Price per share is $ 6.7