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

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