Question

FCF Forecast ($ million)
Year	0	1	2	3	4
Sales	240
Growth versus Prior Year		12.50%	7.40%	6.90%	5.00%
EBIT (10% of Sales)
Less: Income Tax (37%)
Less Increase in NWC (12% of Change in Sales)
Free Cash Flow

Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate in year 4. The spreadsheet above is a template for forecasting Banco Industries' free cash flows (FCFs), with assumptions provided.

a) (8 points) Forecast Banco Industries' FCFs in year 1-4. Banco Industries's FCF is expected to be $Answer million in year 1, $Answer million in year 2, $Answer million in year 3, $Answer million in year 4. State your answers in 2 decimal places.

b) (4 points) Banco Industries expect sales to settle to an industry growth rate of 5% in year 4 and after. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, the best estimate of Banco's stock price is $Answer. (1 decimal place)

Answer 1

All Values in $ Millions

Year	0	1	2	3	4
Sales	240	270	290	310	325
Growth versus Prior Year		12.50%	7.40%	6.90%	5.00%
EBIT (10% of Sales)		27.00	29.00	31.00	32.55
Less: Income Tax (37%)		9.99	10.73	11.47	12.04
Less Increase in NWC (12% of Change in Sales)		3.60	2.40	2.40	1.86
Free Cash Flow		13.41	15.87	17.13	18.65

Banco Industries's FCF is expected to be

$13.41million - Year1, $15.87million - Year 2, $17.13 million - Year3 , $18.65Million in Year4

The terminal value of FCF (Constant perpetual growth) = FCFt x (1 + g) / (k - g)

where FCFt = FCF in year t (18.65Mln)

g = Steady growth rate for the company's cash flow (5%)

k = Cost of capital (Discount Rate = 11%)

Terminal Value of FCF for Banco in year 4

= 18.65 x (1+ 5%) / (11% -5%)

= 19.58/ (0.06)

= $326.30 Million

Value of the firm = PV of all cash flows including the terminal value

PV of cash flows = CFt/ (1+k)^t

where CFt is cash flow in year t, k = Cost of capital (Discount rate) & t is the year of Cash flow

Value of the firm  

= 13.41/ (1+11%)^1 + 15.87/ (1+11%)^2 + 17.13 / (1+11%)^3 + 18.65 / (1+11%)^4 + 326.30/(1+11%)^4

= 12.08 + 12.88 + 12.52 + 12.28 + 214.95

= $264.71 Million

Value of firm (Enterprise Value) = Value of Equity + Value of Debt - Cash & Cash Equivalents

Therefore,

Value of Equity

= Value of Firm + Cash - Value of Debt

=  264.71 + 50 - 80

= $234.71 Million

Number of shares = 18 Million

Value per share

= Value of Equity / Number of shares

= $234.71 / 18

= $13.04