Question

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Fincher Manufacturing has projected sales of $146.2 million next year. Costs are expected to be $81.6...

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 $   

Solutions

Expert Solution

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


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