Question

3.6 FCF Forecast ($ million) Year 0 1 2 3 4 Sales 240 270 290 310 325.5 Growth vs. Prior Year 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales) 27.00 29.00 31.00 32.55 Less: Income Tax (37%) (9.99) 10.73 11.47 12.44 Less: Increase in NWC (12% of Change in Sales). 24 24 1.86 Free Cash Flow 13.41 15.87 17.13 18.65 Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 7% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 10%, $30 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1? O A. $22.76 OB. $45.52 QC. $12.65 OD. $25.29

Answer 1

Tax rate	37%
WACC	10.00%
Terminal growth rate	7.00%
						($ Million)
Year	0	1	2	3	4	Terminal Cash Flow = [FCF year 4 *(1+7%)/(10%-7%)]
Sales	$240	$270	$290	$310	$326
Growth		12.5%	7.4%	6.9%	5.0%
EBIT (10% of sales)		$27.00	$29.00	$31.00	$32.55
Less: Income Tax (37%)		$9.99	$10.73	$11.47	$12.04
Less: Increase in Net working capital		$3.60	$2.40	$2.40	$1.86
Free cash flow (FCF)		$13.41	$15.87	$17.13	$18.65	$665.06
PV of Free cash Flow		$12.19	$13.12	$12.87	$12.74	$454.24
Sum of PVs (value of Firm)		$505.16
Value of Debt of the company ($ million) =	$80.00
Cash ($ million)	$30.00
Value of Equity ($ million) (= Value of Firm -Value of Debt + Cash)=	$455.16
No. of shares outstanding ($ million) =	18
The price per share of the company's stock (= value of equity / no. of shares outstanding) =	$25.29

Therefore correct answer is option D. $25.29

Formulas used in excel formula:

А B с D E F G 0.37 0.1 1 Tax rate 2 WACC 3 Terminal growth rate 4 0.07 ($ Million) Terminal Cash Flow = [FCF year 4 *(1+7%)/(10%-7%)] 1 2 3 290 =(D6-C6)/C6 29 =D8*37% 5 Year 0 6 Sales 240 7 Growth 8 EBIT (10% of sales) 9 Less: Income Tax (37%) 10 Less: Increase in Net working capital 11 Free cash flow (FCF) 12 PV of Free cash Flow 13 Sum of PVs (value of Firm) 14 15 Value of Debt of the company ($ million) = 80 16 Cash ($ million) 30 17 Value of Equity ($ million) (= Value of Firm -Value of Debt + Cash)= =C13-B15+B16 18 No. of shares outstanding ($ million) = 18 19 The price per share of the company's stock (= value of equity / no. of shares ou=B17/B18 270 I=(C6-B6)/B6 27 =C8*37% 3.6 =C8-C9-C10 =C11/(1+$B$2)^C5 I=SUM(C12:12) 310 =(E6-06)/D6 31 =E8*37% 2.4 =E8-E9-E10 =E11/(1+$B$2)^E5 4 325.5 =(F6-E6)/E6 32.55 =F8*37% 1.86 =F8-F9-F10 =F11/(1+$B$2)^F5 2.4 =D8-D9-D10 =D11/(1+$B$2)^D5 =F11*(1+B3)/(B2-B3) =G11/(1+B2)^4