Question

BIOMET VALUATION PROBLEM Three-Stage FCFE Model

Biomet Inc., designs, manufactures and markets reconstructive and trauma devices, and reported earnings per share of $0.56 in 1993, on which it paid no dividends. (It had revenues per share in 1993 of $2.91). It had capital expenditures of $0.13 per share in 1993 and depreciation in the same year of $0.08 per share. The working capital was 60% of revenues in 1993 and will remain at that level from 1994 to 1998, while earnings and revenues are expected to grow 17% a year. The earnings growth rate is expected to decline linearly over the following five years to a rate of 5% in 2003. During the high growth and transition periods, capital spending and depreciation are expected to grow at the same rate as earnings, but are expected to offset each other when the firm reaches steady state. Working capital is expected to drop from 60% of revenues during the 1994- 1998 period to 30% of revenues after 2003. The firm has no debt currently, but plans to finance 10% of its net capital investment and working capital requirements with debt.

The stock is expected to have a beta of 1.45 for the high growth period (1994-1998), and it is expected to decline to 1.10 by the time the firm goes into steady state (in 2003). The treasury bond rate is 7%. Market risk premium is 5.5%. Estimate the value per share, using the FCFE model. ASSUME YOU ARE AT THE START OF THE YEAR 1994.

PLEASE SUBMIT EXCEL SPREADSHEET WITH FORMULAS TO UNDERSTAND CALCULATIONS.

Answer 1

Please understand excel spredsheet cannot be uloaded. Excel Spredsheet Screenshot provided with explanation.