Question

Stock Valuation and Cash Flows Full Boat Manufacturing has projected sales of $115 million next year. Costs are expected to be $67 million and net investment is expected to be $12 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 per- cent, where it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding and investors require a return of 13 percent on the company's stock. The corporate tax rate is 21 percent. a. What is your estimate of the current stock price? b. Suppose instead that you estimate the terminal value of the company using a PE mul- tiple. The industry PE multiple is 11. What is your new estimate of the company's stock price?

Answer 1

y = 14% - Calculate Cashflow you the Stock Price (Sales - Cost) (1-tax) - (Net Investment) ($ 115m - $67m) (0.79) - $ 12 m $ 25.92 million Cash flowy se Cash flow yn Cash Flow you Cash Flow as Cash flowers cfz (1+9) = 25.92 (1.14) = 29.5488 million cfz (1+9) = 29.5488 m (1.12) = $ 33.094656 million cfg (1+g) = 33.094656 (1.60) = $36.4091216 million CFU (1+3) = 36.40412,6 (1.08) = $39.316451328 million 39.316451328 (1.06) - $41.6754 384 million VALUE OF - CF + cha = 25.92 + 29.5488 +33.095 + 36.404 + 39.316 + 41.6754 (1.13)' (1.13)2 + (1.13)3' (1.13) (1.13). (1.13)(0.13-0.01) = 22.938 + 23.14 +22.93 + 22.33 + 21.339 + 526.87 - $ 639.552 million Stock VALUE OF BUSINESS - $ 639.552 million shares outstanding 5.5 million $ 116.28 rounded off value.