Question

Summit Energy is an alternative energy producer. Your hedge fund is interested in investing into the company. As an analyst, you need to estimate firm value and its price per share using the NPV method and report it to the energy portfolio manager. So far you’ve partially forecasted its earnings for 2020-2022 (numbers are in millions).

	Actual earnings			Forecasted earnings
	2017	2018	2019	2020	2021	2022
Revenues	25,137	25,650	24,368	25,220	26,481	26,746
Cost of goods sold	18,375	17,894	19,750	21,230	20,381	19,973
Gross Profit	6,762	7,756	4,618	3,990	6,101	6,773
SG&A	2,235	2,110	2,050	2,200	2,200	2,200
Depreciation	2,000	2,000	2,000	2,000	2,000	2,000
EBIT
Tax expense (25%)
Net income

Assume that annual net working capital represents 10% of revenues. In 2021 Summit plans to purchase new equipment for its new generation of wind mills for $200 million. No other purchases are planned in 2020 or 2022.

Please enter the answer in the following format: XX (no decimals)

A. If Summit has 50 million shares outstanding and $200 million of debt, what is its estimated price per share?

B. If Summit’s stock is currently trading for $500, should your fund invest in the company?

Answer 1

Summit Energy is an alternative energy producer. Your hedge fund is interested in investing into the company. As an analyst, you need to estimate firm value and its price per share using the NPV method and report it to the energy portfolio manager. So far you’ve partially forecasted its earnings for 2020-2022 (numbers are in millions).

Assume that annual net working capital represents 10% of revenues. In 2021 Summit plans to purchase new equipment for its new generation of wind mills for $200 million. No other purchases are planned in 2020 or 2022.

A. If Summit has 50 million shares outstanding and $200 million of debt, what is its estimated price per share?
Calculation of Free cashflow in 2022
Particulars   Amount ($)
Revenue   26746
Less:Cost of goods sold   19973
Gross profit   6773
SG$A   2200
Depreciation   2000
EBIT   2573
Less:Tax @25%   643.25
Profit after tax   1929.75
Add back depreciation   2000
Total cashflow   3929.75
Less:Working capital need(10% of revenue)   2674.6
TOTAL FREE CASHFLOW   1255.15
B. Summit’s stock is currently trading for $500, should your fund invest in the company

Expected rate of return
calculation formula is =Risk free rate +beta x(market rate-risk fre rate)
Risk free rate   4%
Market return   12%
Beta   1.7
Expected return = 4% + 1.7(12-4)%   17.60%

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