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Full Boat Manufacturing has projected sales of $124 million next year. Costs are expected to be...

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.)

Solutions

Expert Solution

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

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