Question

Full Boat Manufacturing has projected sales of $124 million next year. Costs are expected to be $74 million and net investment is expected to be $14.9 million. Each of these values is expected to grow at 15 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 7 percent, where it is expected to remain indefinitely. There are 6.5 million shares of stock outstanding and investors require a return of 12 percent return on the company’s stock. The corporate tax rate is 23 percent.

a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 14. What is your new estimate of the company’s stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

	N	Year	1	2	3	4	5	6
	g	Growth Rate		0.15	0.13	0.11	0.09	0.07	(CONSTANT GROWTH RATE TO PERPETUITY)
	B=Previous years sales*(1+g)	Sales($ million)	$124	$142.60	$161.14	$178.86	$194.96	$208.61
	C=Previous years Costs*(1+g)	Costs($ million)	$74	$85.10	96.16	106.74	116.35	124.49
	D=Previous years investment*(1+g)	Net Investment ($ million)	$14.90	$17.14	$19.36	$21.49	$23.43	$25.07
	E=B-C	Earning Before Taxes	$50	$58	$65	$72	$79	$84
	F=E*(1-0.23) (Tax Rate =23%=.23)	Earning After Taxes	$38.50	$44.28	$50.03	$55.53	$60.53	$64.77
	G=F-D	Free Cash Flow	$23.60	$27.14	$30.67	$34.04	$37.11	$39.70
		Horizon Value in Year 5	39.70/(R-0.07)
		R=Required return=12%=0.12
		Horizon Value in Year 5($million)	$794.06	(39.7/(0.12-0.07)
		N	CF	PV=CF/(1.12^N)
		Year	Cash Flow	Present Value
		1	$23.60	21.07142857
		2	$27.14	21.63584184
		3	$30.67	21.829019
		4	$34.04	21.63411704
		5	$37.11	21.05463176
	(Horizon Value)	5	$794.06	450.5691197
			Total	557.7941579
	A	Value of the Firm in $ million	$557.7941579
	B	Number of share in million	6.50
	C=A/B	Estimated Current Stock Price	$85.81
	b	Terminal/Horizon value
		Earning in Year 5($ million)	$60.53
		Terminal/Horizon value	$847.45	(14*60.53)
		N	CF	PV=CF/(1.12^N)
		Year	Cash Flow	Present Value
		1	$23.60	21.07142857
		2	$27.14	21.63584184
		3	$30.67	21.829019
		4	$34.04	21.63411704
		5	$37.11	21.05463176
		5	$847.45	480.866378
			Total	588.0914162
	D	Value of the Firm in $ million	588.0914162
	E	Number of share in million	6.50
	F=D/E	Estimated Current Stock Price	$90.48