In: Finance
Fincher Manufacturing has projected sales of $146.2 million next year. Costs are expected to be $81.6 million and net investment is expected to be $15.6 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 6.1 million shares of stock outstanding and investors require a return of 15 percent return on the company’s stock. The corporate tax rate is 38 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.) |
Share price | $ |
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.) |
Share price |
$ |
We know : Free Cash Flow of a Firm(FCFF) = Net Operating Profit less adjusted tax - Net Investment
where, Net Operating Profit less adjusted tax(NOPLAT) = EBIT x (1-Tax rate)
Net Investment = Capital Spending – Depreciation + change in Working Capital
To show the Excel Formula :
Stable Growth ie Horizon period beyond 6 years
FCFF7 = 17.47
Horizon value at the end of 6th year = FCFF 7/Required Rate of Return - Growth
= 17.47/(0.15-0.08) = 249.57
Present Value at V6 = 249.57/(1.15)^6
= 107.89
Value of the firm = 123.08+107.89
= 230.98
Therefore, estimated Intrinsic value per share = 230.98/6.1
=$37.86
Part B:
Industry PE = 10
We know PE = Market
Price Per Share
Earning Price Per Share
EPS = EBIT/Number of shares ie 64.6/6.1 = $10.59
10 = Market Price Per
Share
10.59
Therefore, Market Price Per Share = $105.90