In: Finance
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 $14.9 million. Each of these values is expected to grow at 15 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 7 percent, where it is expected to remain indefinitely. There are 6.5 million shares of stock outstanding and investors require a return of 12 percent return on the company’s stock. The corporate tax rate is 23 percent.
a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 14. What is your new estimate of the company’s stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
As per the above condition , 2nd year growth rate is 15%, 13% in 3rd, 11% in 4th year ,9% in 5th year and 7% in year.
Based on the above information,
Sales and Cost figure for next 5 are given below:
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Revenue($ mn) | -14.9 | 124 | 142.6 | 161.138 | 178.8632 | 194.9609 |
Cost($ mn) | 0 | 74 | 85.1 | 96.163 | 106.7409 | 116.3476 |
Terminal value of sales on 6th year= 194.96*1.07/(12%-7%)=$4172.14 mn
Terminal value of cost on 6th year=116.34*1.07/(12%-7%)=$2489.67 mn
Based on the above information share value calculation are given below:
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Revenue($ mn) | -14.9 | 124 | 142.6 | 161.138 | 178.8632 | 194.9609 | 4172.144 |
Cost($mn) | 0 | 74 | 85.1 | 96.163 | 106.7409 | 116.3476 | 2489.676 |
Gross Profit (Sales-Cost)($mn) | -14.9 | 50 | 57.5 | 64.975 | 72.12225 | 78.61325 | 1682.468 |
Tax (23% of Gross Profit)($mn) | 0 | 11.5 | 13.225 | 14.94425 | 16.58812 | 18.08105 | 386.9676 |
Net Profit (Gross Profit-Tax)($mn) | -14.9 | 38.5 | 44.275 | 50.03075 | 55.53413 | 60.5322 | 1295.5 |
Present Value discounted @12% (Value/1.12^year)($mn) | -14.9 | 34.375 | 35.29576 | 35.6109 | 35.29295 | 34.3476 | 656.3408 |
NPV (Total Present Value)($mn) | 816.363 | ||||||
No. of share ($mn) | 6.5 | ||||||
Share price (NPV/no. of share) ($/share) | 125.5943 |