Question

Maslyn Manufacturing has projected sales of $148.4 million next year. Costs are expected to be $82.7 million, and net investment is expected to be $16.7 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 7.2 million shares of stock outstanding and investors require a return of 14 percent on the company's stock. The corporate tax rate is 40 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.) Share price b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 10. 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.) Share price $

Answer 1

Growth rate Sales Costs Profit before Tax Tax @ 40% PAT Net Investment No. of Shares EPS C Next Year = Y1 Gr A (Y2=Y1.Gr & so on) $ 14,84,00,000 $ B (Y2=Y1"Gr & so on) $ 8,27,00,000 $ A-B $ 6,57,00,000 $ DEC-40% r$ 2,62,80,000 $ =C-D $ 3,94,20,000 $ IF (Y2=Y16Gr & so on) $ 1,67,00,000 $ G 72,00,000 HEE/G $ 5.48 $ Y2Y3 Y4Y5 Y6 15% | 13.00% 11.00% 1 9 .00% 7.00% 17,06,60,000 $ 19,62,59,000 $ 22,56,97,850 $ 25,95,52,528 $ 29,84,85,407 9,51,05,000 $10,93,70,750 $ 12,57,76,363 $ 14,46,42,817 $ 16,63,39,239 7,55,55,000 $ 8,68,88,250 $ 9,99,21,488 $ 11,49,09,711 $ 13,21,46,167 3,02,22,000$ 3,47,55,300 $ 3,99,68,595 $ 4,59,63,884 $ 5,28,58,467 4,53,33,000 $ 5,21,32,950 $ 5,99,52,893 $ 6,89,45,826 $ 7,92,87,700 1,92,05,000 $ 2,20,85,750 $ 2,53,98,613 $ 2,92,08,404 $ 3,35,89,665 E 6.30 $ 7.24 $ 8.33 $ 9.58 $ 11.01 a. Estimate of the Current Stock Price: Free Cashflow to Equity: Investment F $ -1,67,00,000 $ -25,05,000 $ -28,80,750 $ -33,12,863 $ 38,09,792 $ -43,81,261 | РАТ E $ 3.94,20,000 $ 4,53,33,000 $ 5,21,32,950 $ 5,99,52,893 $ 6,89,45,826 $ 7,92,87,700 Net Free Cashfow to Equity IEEEF $ 2,27,20,000 $ 4,28,28,000 $ 4,92,52,200 $ 5,66,40,030 $ 6,51,36,035 $ 7,49,06,440 Terminal Value @ 7% Growth rajall of Y6*(1+7%)/(14%-7%), wherein 7% is growth rate, 14% cost of equity i.e expected return of investol $ 1,14,49,98,435 K=1+) $ 2,27,20,000 $ 4,28,28,000 $ 4,92,52,200 $ 5,66,40,030 $ 6,51,36,035 $1,21,99,04,875 NPV @ 14% (expected return) L=NPV(14%,Y1:Y6) $ 70,92,65,722 Estimated Share Price M=L/G $ 98.51 No. of Shares 72,00,000 $ 4,28,28,000 $ 4,92,52,200 $ 5,66,40,030 $ b. Estimate of the Stock Price with terminal value using PE multiple of 10: Net Free Cashfow to Equity $ 2,27,20,000 Terminal Value @ PE Multiple 1 N=H*10* G T $ 2,27,20,000 NPV @ 14% (expected return) N=NPV(14%,Y1:Y6) $ 54,88,43,935 Estimated Share Price $ 76.23 No. of Shares 72,00,000 6,51,36,035 $ 7,49,06,440 $ 79,28,77,003 6,51,36,035 $ 86,77,83,443, $ 4,28,28,000 $ 4,92,52,200 $ 5,66,40,030 $