Question

New Millenium Company earned ​$2.2 million in net income last year. It took depreciation deductions of ​$299,000 and made new investments in working capital and fixed assets of

​$104,000 and ​$345,000 respectively.

a. What was New​ Millenium's free cash flow last​ year?

b. Suppose that the​ company's free cash flow is expected to grow at 4​% per year forever. If investors require a return of 7% on Millenium​ stock, what is the present value of​ Millenium's future free cash​ flows?

c. New Millenium has 3.7 million shares of common stock outstanding. What is the​ per-share value of the​ company's common​ stock?

d. What is the​ company's P/E ratio based on last​ year's earnings​ (i.e., trailing​ earnings)?

e. What is the​ company's P/E ratio based on next​ year's earnings​ (assuming that earnings grow at the same rate as free cash​ flow).

Answer 1

@ Face Cash flow dast year - = Net Income + depreciation, - Working Capital investment - Investment in fined assets 2200000 t 299000 -/4000 - 345000 $ 2.50000 op 6 Growth rate of free Cash flow=4% per year NO trever Now, PV of future free Cash flews - fet, where, fcf = free Cash flow in year / doll -/18 = required return P 9 = growth rale PV = 2050000 (1.04) = $ 71066666.67 o.07 - 0.04 ol Adidas $71.07 million Ofer Share value of Stack = PV of future Cash flow Number of sharly e outstanding 71.07 = $ 19.21 = 3.7

PAGE NO.: PAGE NO.: (d) ple ratio = Price per share of Stock C Earning per shere where, EPS = 270000 = $0.99 Hence, P/E ratio = 19.21 = 32.56 ell 3700000 0.59