Question

In: Finance

Cleanlab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It recently reported earnings per...

Cleanlab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It recently reported earnings per share of $2.55 and expects earnings growth of 8% a year for the next two years and 4% a year after that. The capital expenditure per share was $2.15, depreciation was $1.05 per share, and working capital expenditure was $0.25 per share and all three are expected to grow at the same rate as earnings. The firm has a target debt ratio of 40%, the stock’s beta is 1.20, the risk-free rate is 3.0% and the equity risk premium is 6%.

  1. Calculate intrinsic value per share for Cleanlab Inc. using the FCFE model.
  1. $31.41
  2. $32.22
  3. $32.97
  4. $33.41

Solutions

Expert Solution

Step 1 - Computation of cost of equity using CAPM method

Cost of equity = Risk Free Rate + (Beta * Equity Risk Premium) = 3%+(1.2*6%) = 10.2%

Step 2 - Computation of Free-Cash Flows:

Working

FCFF = The capital expenditure (adjusted for depreciation) and working capital expenditure gets offset partially by debt which is at 0.4 (target debt ratio given in question).

Step 3 - Computation of terminal value

Terminal Value = (FCFF of year 3 *(1+growth %)) / (cost of equity - growth %) = (2.111*(1+4%))/(10.2%-4%) = $35.41

Step 4 - Computation of Intrinsic Value of Share

Intrinsic Value = Present Value of FCFF + Present Value of Terminal Value

= (1.879*(1/(1+10.2%)^1))+(2.030*(1/(1+10.2%)^2))+(2.111*(1/(1+10.2%)^3))+(35.41*(1/(1+10.2%)^3)) = 1.705+1.671+1.577+26.456 = 31.41

Thus, intrinsic value per share is $31.41 (option a)


Related Solutions

RAYA Corporation sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share...
RAYA Corporation sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of $2.35 in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998, and 6% a year after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993. Both are expected to grow at the same rate as earnings from 1994 to 1998. Working capital is expected to remain at 5% of revenues, and revenues...
New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000...
New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)? a. $ 980,000 b. $1,220,000 c. $2,000,000 d. $2,500,000 e. $3,500,000
New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000...
New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)? Question 30 options: $ 980,000 $1,220,000 $2,000,000 $2,500,000 $3,500,000
Biomet Inc., designs, manufactures and markets reconstructive and trauma devices, and reported earnings per share of...
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...
For the year ending December 31, 2020, Bad Year, Inc. reported Basis Earnings Per Share in...
For the year ending December 31, 2020, Bad Year, Inc. reported Basis Earnings Per Share in the amount of $ 1.75, which was calculated as Net Income of $ 1,050,000 dividend by 600,000 weighted average commonshares outstanding. Bad Year, Inc. does not have a preferred stock outstanding, and did not pay any common dividends during 2020. Throughout 2020, employees of Bad Year, Inc. owned 150,000 stock options, which entitled them to purchase 150,000 shares of Bad Year, Inc. common stock...
Medtronic Inc., the world's largest manufacturer of implantable biomedical devices, reported earnings per share in 2017...
Medtronic Inc., the world's largest manufacturer of implantable biomedical devices, reported earnings per share in 2017 of $3.95 and paid dividends per share of $0.68.    Its earnings are expected to grow by 16% in 2018 and in 2019; the growth rate is expected to decline each year after that to a stable growth rate of 6% in 2021.    The payout ratio is expected to remain unchanged from 2017 to 2019, after which it will increase each year to reach 50%...
5-BIG TECH Inc. sells at $40 per share, and its latest 12-month earnings were $8 per...
5-BIG TECH Inc. sells at $40 per share, and its latest 12-month earnings were $8 per share, of which $3.20 per share were paid as dividends. a. What is Big Tech’s current P/E ratio? b. If Big Tech’s earnings are expected to grow by 9 percent per year, what is the projected price for next year assuming that the P/E ratio remains constant? c If you had a required rate of return of 15 percent, expected the dividend payout ratio...
Office Furniture Systems, Inc. sells chairs for $150. The unit variable cost per unit is $65....
Office Furniture Systems, Inc. sells chairs for $150. The unit variable cost per unit is $65. Fixed costs total $18,700. Required: a.   What is the contribution margin per unit? b.   What is the breakeven point in units? c.   How many units must be sold to earn a pretax income of $45,000? d.   What is the margin of safety, assuming 700 units are sold?
Kenny Rogers Roasters recently reported Earnings before Interest and Taxes of $235,600. They have a tax...
Kenny Rogers Roasters recently reported Earnings before Interest and Taxes of $235,600. They have a tax rate of 30%. They also reported $6,034,000 in Sales, $75,600 in Net Income, and $3,496,672 in Total Assets. What is the Basic Earning Power for Kenny Rogers Roasters? (answers are in percentage rounded to two decimals)
Nicholas Health Systems recently reported an EBITDA of $25.0 million and net income of $15.8 million....
Nicholas Health Systems recently reported an EBITDA of $25.0 million and net income of $15.8 million. It had $2.0 million of interest expense, and its federal tax rate was 21% (ignore any possible state corporate taxes). What was its charge for depreciation and amortization?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT