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Fincher Manufacturing has projected sales of $147 million next year. Costs are expected to be $82...

Fincher Manufacturing has projected sales of $147 million next year. Costs are expected to be $82 million and net investment is expected to be $16 million. Each of these values is expected to grow at 15 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 7 percent, where it is expected to remain indefinitely. There are 6.5 million shares of stock outstanding and investors require a return of 14 percent return on the company’s stock. The corporate tax rate is 35 percent.

  

A.

What is your estimate of the current stock price?

B.

Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 13. What is your new estimate of the company’s stock price?

Solutions

Expert Solution

(A)

(B) Total PV of non-perpetual FCFs = P1 = $ 113.133 million

Terminal Value using a PE Ratio of 13 = Year 6 NOPAT x PE Multiple = 71.07817 x 13 = $ 924.0162 million

PV of Terminal Value = PV(T) = 924.0162 / (1.14)^(5) = $ 479.905 million

Therefore, Total Intrinsic Value = PV(T) + P1 = 479.905 + 113.133 = $ 593.038 million

Total Shares Outstanding = N = 6.5 million

Company Stock Price = 593.038 / 6.5 = $ 91.237 approximately

jeff jeffy answered 2 years ago
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