Question

ebook Problem 8-08 A company had $20 of sales per share for the year that just ended. You expect the company to grow their sales at 6.25 percent for the next five years. After that, you expect the company to grow 4.25 percent in perpetuity. The company has a 14 percent ROE and you expect that to continue forever. The company's net margins are 6 percent and the cost of equity is 8 percent. Use the free cash flow to equity model to value this stock. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Plese enter  24.57 in the answer box.

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $.

Year, n	Linkage	0	1	2	3	4	5	6
Sales	A	20.00	21.25	22.58	23.99	25.49	27.08	28.23
Growth	g		6.25%	6.25%	6.25%	6.25%	6.25%	4.25%
Net Margin	B		6%	6%	6%	6%	6%	6%
Net Income	C = A x B		1.28	1.35	1.44	1.53	1.62	1.69
ROE	D		14%	14%	14%	14%	14%	14%
Retention Ratio	E = g / D		44.64%	44.64%	44.64%	44.64%	44.64%	30.36%
FCFE	F = C x (1 - E)		0.71	0.75	0.80	0.85	0.90	1.18
Cost of equity	G	8%
Discount factor	H = (1 + G)^(-n)		0.9259	0.8573	0.7938	0.7350	0.6806
Terminal value	I = 1.18 / (8% - 4.25%)						31.46
PV of FCFE	J = F x H		0.65	0.64	0.63	0.62	0.61
PV of terminal value	K = I x H						21.41
Value of the stock	Sum of J & K	24.57