Question

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 expectedto 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%.

Question: Estimate the value per share, using the FCFE model.ASSUME YOU ARE AT THE START OF THE YEAR 1994.

Please Use excel and show formulas

Answer 1

YEAR	1	2	3	4	5	formula
REVENUES	3.4	3.98	4.66	5.45	6.38	=revenue*1.17
EARNINGS	0.66	0.77	0.9	1.05	1.23	=earnings*1.17
(CAPEX - DEPN) X (1-d)	0.05	0.06	0.07	0.08	0.10	=(capex - depn) x (1-d)
VAR NWC x(1-d)	0.27	0.31	0.37	0.43	0.5	Net working cap x (1-d)
FCFE	0.34	0.39	0.46	0.54	0.63	earnings - capex - depn - NWC
Discount factor	1.150	1.322	1.520	1.747	2.009	DISCOUNTING FACTOR x 1.15
PV(FCFE)	0.29	0.30	0.30	0.31	0.31	FCFE / discounting factor

The discount rate for this periods is 7% + 1.45*5.5% = 14.975%

YEAR	6	7	8	9	10
REVENUES	7.31	8.2	9.01	9.64	10.15	=revenue x 1.12
GROWTH	14.6%	12.2%	9.8%	7.4%	5%	as per question
EARNINGS	1.41	1.58	1.73	1.83	1.95	=earnings*1.12
(CAPEX-DEPN) x (1-d)	0.11	0.13	0.14	0.15	0.16	(capex-depn) x (1-d)
var NWC x (1-d)	0.11	-0.01	-0.14	-0.27	-0.39	NWC x (1-d)
FCFE	1.19	1.46	1.73	1.98	2.19	earnings - capex - depn - nwc
BETA	1.38	1.31	1.24	1.17	1.1	as per question condition
COST OF EQUITY	14.59%	14.21%	13.82%	13.44%	13.05%	dividend x(1+g) /ke-g
DISCOUNTING FACTOR	2.302	2.629	2.993	3.395	3.838	discounting factor x 1.14
PV (FCFE)	0.51	0.56	0.58	0.58	0.57	FCFE x discounting factor

Cash Flow for the stable growth period is $1.92 (it is equal toearnings of $1.95*1.05 minus the Variation in NWC for the next period,$0.13).

Putting it all together, the value per share is $10.51.

NOTE - PLEASE APPRECIATE THE WORK