Question

Lockeran Co. has the following projected sales, costs, net investment and free cash flows in millions. The anticipated growth rate in free cash flows after year 6 is 3% per year forever. there are 3 million shares outstanding and investors require a return of 8% on the company's stock.

1.Using the constant growth model to find the terminal value, calculate the price of the company's stock.

2. Suppose instead that you estimate the terminal value using a PE multiple of 0.75, calculate the price of the company's stock.

	1	2	3	4	5	6
Sales	176.00	200.64	224.72	247.19	266.97	282.99
Costs	82.5	94.05	105.34	115.87	125.15	132.66
Taxes	17.33	19.75	22.12	24.33	26.28	27.85
Net Income (OCF)	76.17	86.84	97.26	106.99	115.54	122.48
Net Investment	45	51.3	57.46	63.21	68.27	72.37
FCF	31.17	35.54	39.80	43.78	47.27	50.11

Answer 1

	1	2	3	4	5	6
Sales	176	200.64	224.72	247.19	266.97	282.99
Costs	82.5	94.05	105.34	115.87	125.15	132.66
Taxes	17.33	19.75	22.12	24.33	26.28	27.85
Net Income (OCF)	76.17	86.84	97.26	106.99	115.54	122.48
Net Investment	45	51.3	57.46	63.21	68.27	72.37
FCF	31.17	35.54	39.8	43.78	47.27	50.11
PV of Formula	=31.17/(1+8%)^1	=35.54/(1+8%)^2	=39.8/(1+8%)^3	=43.78/(1+8%)^4	=47.27/(1+8%)^5	=50.11/(1+8%)^6
PV of FCF	28.86	30.47	31.59	32.18	32.17	31.58
PV of all FCF	186.85
Terminal value using model
Terminal value = (FCF*(1+growth rate))/(cost of capital - growth rate)
Terminal value =(50.11*(1+3%))/(8%-3%)
Terminal value = 1032.27
PV of Terminal value = 1032.27/(1+8%)^6
PV of Terminal value = 650.51
Total value = PV of all FCF + PV of Terminal value
Total value = 186.85+650.51
Total value = 837.36
Terminal value using P/E Multiple
Terminal value = (P/E )* (Year 6 Net income)
Terminal value = 0.75*122.48
Terminal value = 91.86
PV of Terminal value =91.86/(1+8%)^6
PV of Terminal value = 57.89
Total value = PV of all FCF + PV of Terminal value
Total value = 186.85+57.89
Total value = 244.74