4. Vanguard Office Supplies is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting standpoint, Vanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals, bond and linen paper, and other products. To accomplish this objective, Vanguard is considering the purchase of Omega Paper, a manufacturer of paper products and notebooks. A five-year income forecast for Omega is given, along with other pertinent information. Vanguard plans to keep Omega's debt-equity ratio at its current level [Use spreadsheet Valuation Workbook provided]
Five-Year Forecast ($ MM) |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Revenue |
957.9 |
972.2 |
986.8 |
1,001.6 |
1,016.6 |
Cost of goods sold |
862.1 |
875.0 |
888.1 |
901.4 |
915.0 |
SG&A |
67.0 |
68.1 |
69.1 |
70.1 |
71.2 |
EBIT |
28.7 |
29.2 |
29.6 |
30.0 |
30.5 |
Interest expense |
12.5 |
13.4 |
13.8 |
14.1 |
14.4 |
EBT |
16.2 |
15.7 |
15.8 |
16.0 |
16.1 |
Taxes |
5.5 |
5.3 |
5.4 |
5.4 |
5.5 |
Net Income |
10.7 |
10.4 |
10.5 |
10.5 |
10.6 |
Other projections: |
|||||
Change in net working capital |
(5.7) |
(5.8) |
(5.9) |
(6.0) |
(6.1) |
Capital expenditures |
28.7 |
29.2 |
80.3 |
62.2 |
30.5 |
Depreciation |
52.7 |
53.5 |
54.3 |
55.1 |
55.9 |
Tax rate 34.0% |
|||||
Book value of debt ($MM) |
192.3 |
||||
Book value of equity ($MM) |
364.9 |
||||
Share price ($) |
10.5 |
||||
Beta |
0.76 |
||||
Shares outstanding (MM) |
51.5 |
||||
Interest rate on company debt |
6.5% |
||||
Current bond yields on similarly rated companies |
6.1% |
||||
10-year T-bond rate |
5.0% |
||||
Inflation |
2.5% |
||||
Market risk premium |
6.0% |
Calculate the equity value in total and per share of Omega using the discounted cash flow method (show all your calculations for credit).
SOLUTION:-
Particulars | Year-1 | 2 | 3 | 4 | 5 |
EBIT | 28.70 | 29.20 | 29.60 | 30 | 30.50 |
Less:Tax @ 34% | 9.80 | 9.90 | 10.10 | 10.20 | 10.40 |
NOPAT | 18.90 | 19.20 | 19.50 | 19.80 | 20.10 |
Add:-Deprecaition | 52.70 | 53.50 | 54.30 | 55.10 | 55.90 |
Less:Capital Exp | 28.70 | 29.20 | 80.30 | 62.20 | 30.50 |
Add:- Negatvive Change in net W.Capital | 5.7 | 5.8 | 5.9 | 6 | 6.1 |
FCFF | 48.60 | 49.30 | -0.6 | 18.70 | 51.60 |
..
After tax cost of debt = 6.1*0.66 = 4.03%
Cost of Equity = 5 + 6*0.76 = 9.56%
..
Wacc = 7.65%
..
Value of Firm = $811.33
VALUE OF EQUITY = Value of firm - value of debt
= 811.33 - 192.30
= $619.03 m
..
Per share value = $12.02
4. Vanguard Office Supplies is a nationwide retail chain that offers office supplies and office furniture....
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