Question

1. An analyst is trying to value KL’s stock. The analyst has collected data from the company and other sources to prepare the below financials, both actual and projected. Based upon these sources, the analyst expects the company’s free cash flows to grow at 8% in 2019, 6% in 2020, and at 4% on average thereafter. The analyst has estimated the company’s cost of capital to be 12.01%. Given this and the below information, what is the value of the firm? What is a reasonable estimate of its appropriate share price today assuming that there are 10,000,000 shares issued and outstanding?

Income statement for the fiscal year ending January 1 (Millions of dollars)

2017 (Actual)		2018 (Projected)
Net Sales	$400.0		$430.0
Costs	260.0		283.5
Depreciation	37.5		42.5
Earnings before interest and taxes	102.5		104.0
Interest expense	14.1		16.0
Earnings before taxes	88.4		89.9
Taxes (40%)	35.36		35.2
Net income before preferred dividends	53.04		52.8
Preferred dividends	6.0		6.5
Net income	47.04		46.3
Common dividends	37.632		38.2
Addition to retained earnings	9.0408		8.1

Balance sheets for the fiscal year ending January 1 (Millions of dollars)

2017 (Actual)		2018 (Projected)
Cash	$6.3		$6.6
Marketable Securities	40.9		37.128
Accounts Receivable	62.0		66.0
Inventories	107.0		115.5
Net plant & equipment	391.0		415.36
Total Assets	607.2		640.58
Accounts payable	9.6		12.1
Accruals	25.5		29.1
Long-term bonds	210.7		227.78
Preferred Stock	55		57.1
Common Stock (Par plus PIC)	160.0		160.0
Retained earnings	146.4		154.5
Total Liabilities & Equity	607.2		640.58

Answer 1

Free cash Flow to Firm (FCFF) =

EBIT= Earning Before Interest and Tax

t= tax rate

Cap.Ex = Capital Expenditure

= Change in working capital

calculating capital expenditure in 2018-

- Net plant and equipment in 2018 end = Net plant and equipment in 2017 end+ capital expenditure in 2018-depreciation in 2018.

Particulars	Amount($Million)
Net plant & equipment in 2018	415.36
Add-Dereciation of 2018	42.5
Less-Net plant & equipment in 2017	391
Addition of plant & equipment or Capital expenditure in 2018	66.86

calculating working capital change in 2018-

working capital = Curremt assets-Current liabilities

Working capital chahnge in 2018 = Net working capital in 2018- Net working capital 2017

	2018	2017	Changes
Current assets	$MILLION	$MILLION
Cash	6.6	6.3
Marketable Securities	37.128	40.9
Accounts Receivable	66	62
Inventories	115.5	107
Total current assets(A)	225.228	216.2
Current liabilties
Accounts payable	12.1	9.6
Accruals	29.1	25.5
Total Current liabilities(B)	41.2	35.1
Net working capital(A-B)	184.028	181.1	2.928

hence net working capital change is $2.928 million

Free cash Flow to Firm (FCFF) =

=>FCFF of 2018 = 104(1-0.40)+ 42.5 -66.86-2.928 = $35.112 MILLION

FCFF of 2019 = FCFF of 2018*(1+growth) = $35.112*(1+8%) = $35.112*1.08 = $37.92096 million

FCFF of 2020 = FCFF of 2019*(1+growth) = 37.92096*(1+6%) = 37.92096*1.06 = $40.1962176 million

FCFF of 2021 = FCFF of 2020*(1+growth) = 40.1962176*1.04 = $41.8040663 million

v0 = value of firm at year 0

FCFF1 = Next year Free cash flow

Ke = cost of capital

g =growth rate

=>value of firm at year 2020 end = FCFF at 2021/(12.01%-4%) = $41.8040663 million / 0.0801 = $521.8984557 million

value of Firm at 2017 = PV of FCFF till 2020+ PV of value of firm at the end of 2020

sl no	year		Amount($million)(A)	[email protected]%(B)	pv of FCFF(A*B)
1	2018	FCFF	35.112	0.8927774306	31.34720114
2	2019	FCFF	37.92096	0.7970515406	30.22495959
3	2020	FCFF	40.1962176	0.7115896264	28.60321147
3	2020	Value of firm	521.8984557	0.7115896264	371.3775271
				Total	461.5528993

hence value of firm at 2017 = $461.5528993 million or $461.553 million (Round off)

value of firm = value of shares+value of debt+value of preferred stock

=>value of share = value of firm-value of debt-value of preferred stock

=>value of share at 2017 = $461.553 million-$210.7 million-$55 million = $195.853 million

estimate share price = value of share/ number of shares outstanding

=>Esimated share price today = $195.853 million/ 10 million share = $19.5853 per share or $19.59 per share approx