Question

Fincher Manufacturing has projected sales of $147 million next year. Costs are expected to be $82 million and net investment is expected to be $16 million. Each of these values is expected to grow at 15 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 7 percent, where it is expected to remain indefinitely. There are 6.5 million shares of stock outstanding and investors require a return of 14 percent return on the company's stock. The corporate tax rate is 35 percent. a. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 13. What is your new estimate of the company's stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price $

Answer 1

Particulars	Cash Flow
Sales	187
Cost	82
Earning Before Tax	105
Tax	36.75
Earning After Tax	68.25
Less : Investment	-31.5
Cash Flow After Tax	36.75

Year	Growth Rate	Free cash Flow
1		36.75
2	15	42.26
3	13	47.76
4	11	53.01
5	9	57.78
6	7	61.83

Calculation of Terminal Value at Year 6 = Free Cash Flow in Year 6 (1+g) / Ke - g

Terminal Value in year 6 = 61.83 * 1.07 / 0.14 - 0.07 = 945.05

Now we will calculate the present value of all these cash flows using 14 % discount rate

Year	Growth Rate	Amount	Present Value Factor @ 14%	Present Value
1	Free Cash Flow	36.75	0.9346	34.35
2	Free Cash Flow	42.26	0.8734	36.91
3	Free Cash Flow	47.76	0.8163	38.98
4	Free Cash Flow	53.01	0.7629	40.44
5	Free Cash Flow	57.78	0.7130	41.20
6	Free Cash Flow	61.83	0.6663	41.20
6	Terminal Value	945.05	0.6663	629.73
			Value of Equity Today	862.80
			NO of shares	6.5
			Current Stock Price	132.74

Current Stock Price = 132.74

b) Terminal Value = 61.83 * 13 = 803.79

Year	Growth Rate	Amount	Present Value Factor @ 14%	Present Value
1	Free Cash Flow	36.75	0.9346	34.35
2	Free Cash Flow	42.26	0.8734	36.91
3	Free Cash Flow	47.76	0.8163	38.98
4	Free Cash Flow	53.01	0.7629	40.44
5	Free Cash Flow	57.78	0.7130	41.20
6	Free Cash Flow	61.83	0.6663	41.20
6	Terminal Value	803.79	0.6663	535.60
			Value of Equity Today	768.68
			NO of shares	6.5
			Current Stock Price	118.26

New Current Stock Price = 118.26