Question

Fincher Manufacturing has projected sales of $147.2 million next year. Costs are expected to be $82.1 million and net investment is expected to be $16.1 million. Each of these values is expected to grow at 16 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 8 percent, where it is expected to remain indefinitely. There are 6.6 million shares of stock outstanding and investors require a return of 15 percent return on the company’s stock. The corporate tax rate is 40 percent. a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Calculate Share price in $ b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 10. What is your new estimate of the company’s stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Calculate Share price in $

Answer 1

a)		1	2	3	4	5	6>>>>>>
	Sales	147.20
	Costs	82.10
	EBIT	65.10
	Tax at 40%	26.04
	NOPAT	39.06	45.31	51.65	57.85	63.64
	Less: Net investment	16.10
	FCFF	22.96
	Growth rate in FCFF		16%	14%	12%	10%	8%
	Expected FCFF	22.96	26.63	30.36	34.01	37.41	40.40
	PVIF at 15%	0.86957	0.75614	0.65752	0.57175	0.49718
	PV of FCF at 15%	19.97	20.14	19.96	19.44	18.60
	Sum of PVs of FCFF t1 to t5	98.11
	Terminal value of FCFF = 40.40/(0.15-0.08) =						577.14
	PV of terminal value = 577.14*0.49718 =	286.94
	Value of the firm = 98.11+286.94 =	385.05
	Number of shares outstanding	6.60
	Share price	$58.34
b)	Sum of PVs of FCFF t1 to t5	98.11
	Terminal value based on PE multiple of 10 = 63.64*10 =						636.40
	PV of terminal value = 636.40*0.49718 =	316.40
	Value of the firm = 98.11+316.40 =	414.51
	Number of shares outstanding	6.60
	Share price	$62.80