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. ​[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

Free Cash Flow to Firm (FCFF) is derived using the following formula :-

FCFF = EBIT * (1-tax rate) + Depreciation - Fixed Capital Investment - Working Capital Investment

EBIT refers to Earnings before Interest and Taxes or Operating Profit.

Please Note that the Question does not provide any information regarding "Depreciation", "Fixed Capital Investment" and "Working Capital Investment" and hence, we are assuming them to be 0

Attaching the calculations and the formulas used :-

Showing all the formulas :

Hence, Enterprise Value = 1592.70 mn

We know that,

Enterprise Value = Market Value of Debt + Market Value of Equity - Cash & Cash Equivalents

Plugging in known values we get :-

1592.70 = 104 + Market Value of Equity - 89

1592.70 - 15 = Market Value of Equity

Market Value of Equity = 1577.70 mn

No of shares outstanding = 154 mn

Hence, share price = ( 1577.70 / 154) = 10.25

Share Price = $10.25