Question

You are valuing Soda City Inc. It has $111 million of debt, $86 million of cash, and 161 million shares outstanding. You estimate its cost of capital is 11.9%. You forecast that it will generate revenues of $709 million and $791 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 24%, tax rate is 28%, reinvestment rate is 29%, and terminal EV/FCFF exit multiple at the end of year 2 is 14. 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 $709 million and $791 million over the next two years. Projected operating profit margin is 24%, tax rate is 28%, reinvestment rate is 29%, and terminal EV/FCFF exit multiple at the end of year 2 is 14.

So, EBIT in year 1 = 24% of 709 = $170.16 million

FCFF in year 1 = EBIT*(1-t)*(1-reinvestment rate) = 170.16*(1-0.28)*(1-0.29) = $86.99 million

Simmilarly EBIT for year 2 = 24% of 791 = $189.84 million

FCFF in year 2 = 234*(1-0.28)*(1-0.29) = $97.05 million

Company's cost of capital Kc = 11.90%

terminal exit value for this company is 14

So, terminal value of the company = 14*97.05 = $1358.65 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 = 86.99/1.119 + 97.05/1.119^2 + 1358.65/1.119^2 = $1240.28 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 1240.28 - 111 + 86 = $1215.28 million

Thus market value of equity = $1215.28 million

So stock price per share = Market value of equity/number of shares = 1215.28/161 = $7.5 per share

So, company stock price today = $7.5 per share.