A company had $18 of sales per share for the year that just ended. You expect...

A company had $18 of sales per share for the year that just ended. You expect the company to grow their sales at 6.25 percent for the next five years. After that, you expect the company to grow 4 percent in perpetuity. The company has a 13 percent ROE and you expect that to continue forever. The company's net margins are 6 percent and the cost of equity is 8 percent. Use the free cash flow to equity model to value this stock. Do not round intermediate calculations. Round your answer to the nearest cent.

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Expert Solution

Answer :

	0	1	2	3	4	5	6
Sales (a)	18.00	19.125	20.3203125	21.590332	22.939728	24.373461	25.34840
Growth (g)		6.25%	6.25%	6.25%	6.25%	6.25%	4%
Net Margin (m)		6%	6%	6%	6%	6%	6%
Net Income i = (a * m)		1.1475	1.219219	1.29541992	1.376384	1.462408	1.520904
ROE (r)		13%	13%	13%	13%	13%	13%
Retention Ratio (b ) = g / r		48.0769%	48.0769%	48.0769%	48.0769%	48.0769%	30.769231%
Free cash flow to equity(FCFE) = i * ( 1 - b)		0.595818	0.6330563	0.6726222	0.714661	0.759328	1.052934
Cost of equity (ke) (given)	8%
Discount factor @ 8%		0.925926	0.857339	0.793832	0.735030	0.680583
Terminal value (Refer Working Note)						26.32335
PV of FCFE		0.55168	0.5427439	0.533949	0.525297	0.516786
PV of terminal value						17.91522

Value of Stock = Sum of PV of FCFE + PV of Terminal Value

= 0.55168 + 0.5427439 + 0.533949 + 0.525297 + 0.516786 + 17.91522

= $20.5856759 or $20.59

Working note : Calculation of Terminal value = FCFE of year 6 / ( ke - g)

= 1.052934 / (0.08 - 0.04)

= 26.32335

jeff jeffy answered 1 year ago

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