Question

You are valuing Soda City Inc. It has $150 million of debt, $70 million of cash, and 200 million shares outstanding. You estimate its cost of capital is 8.0%. You forecast that it will generate revenues of $740 million and $760 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 40%, tax rate is 20%, reinvestment rate is 60%, and terminal EV/FCFF exit multiple at the end of year 2 is 8. What is your estimate of its share price? Round to one decimal place.

(Hint：First, compute projected FCFF for years 1 and 2 using revenues, operating profit margin, tax rate, and reinvestment rate. Then compute terminal value using the exit multiple method, discount all FCFFs and TV to find EV, finally walk the bridge to the stock price.)

Answer 1

Explanations for the formulas used

Steps followed :

Calculated FCFF using given information then found terminal value. Discounted all values to bring it to present year.

This is the Enterprise Value. Now we will add cash and deduct Debt to arrive at the Equity Value.

Dividing this by the number of shares gives us the Share Price which is $ 3.79.