Question

You are valuing Soda City Inc. It has $125 million of debt, $80 million of cash, and 175 million shares outstanding. You estimate its cost of capital is 10.5%. You forecast that it will generate revenues of $720 million and $780 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 30%, tax rate is 25%, reinvestment rate is 40%, and terminal EV/FCFF exit multiple at the end of year 2 is 12. What is your estimate of its share price? Round to one decimal place

Answer 1

Given for Soda City Inc.

forecast that it will generate revenues of $720 million and $780 million over the next two years. Projected operating profit margin is 30%, tax rate is 25%, reinvestment rate is 40%, and terminal EV/FCFF exit multiple at the end of year 2 is 12.

So, EBIT in year 1 = 30% of 720 = $216 million

FCFF in year 1 = EBIT*(1-t)*(1-reinvestment rate) = 216*(1-0.25)*(1-0.4) = $97.2 million

Simmilarly EBIT for year 2 = 30% of 780 = $234 million

FCFF in year 2 = 234*(1-0.25)*(1-0.4) = $105.3 million

Company's cost of capital Kc = 10.50%

terminal exit value for this company is 12

So, terminal value of the company = 12*105.3 = $1263.60 million

So, enterprise value is PV of FCFF and TV discounted at Kc

So, EV0 = FCFF1/(1+Kc) + FCFF2/(1+Kc)^2 + TV/(1+Kc)^2

EV0 = 97.20/1.105 + 105.30/1.105^2 + 1263.60/1.105^2 = $1209.07 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 1209.07 - 125 + 80 = $1164.07 million

Thus market value of equity = $1164.07 million

So stock price per share = Market value of equity/number of shares = 1164.07/175 = $6.65 per share

So, company stock price today = $6.65 per share.