Show work and explain please for lifesaver... You have estimated the financial s
ID: 2647262 • Letter: S
Question
Show work and explain please for lifesaver...
You have estimated the financial statements for next year.You expect free cash flows to grow by 10% in Y2, 6% in Y3 and 4% on average thereafter.The cost of capital is estimated at 10%.Assume today is January of Y1.Estimate the share price if there are 10M shares issued and outstanding.
GRAVEL: INCOME STATEMENT (M$)
Fiscal Year Ending
Y0 (Actual)
Y1 (Projected)
Sales
350
450
Cost of Goods Sold
150
200
SG&A
75
75
Depreciation
25
25
Earnings Before Interest & Tax (EBIT)
100
150
Interest Expense
20
25
Earnings Before Tax
80
125
Taxes (40%)
32
50
Net Income
48
75
Dividends
8
10
Additions to Retained Earnings
40
65
GRAVEL: BALANCE SHEET (M$)
Fiscal Year Ending
Y0 (Actual)
Y1 (Projected)
Cash
100
150
Accounts Receivable
200
250
Inventories
300
350
Net Fixed Assets
1,000
1,050
TOTAL ASSETS
1,600
1,800
Accruals
50
90
Accounts Payable
150
195
Long Term Debt
250
300
Common Stock
350
350
Retained Earnings
800
865
Total Liability & Equity
1,600
1,800
Fiscal Year Ending
Y0 (Actual)
Y1 (Projected)
Sales
350
450
Cost of Goods Sold
150
200
SG&A
75
75
Depreciation
25
25
Earnings Before Interest & Tax (EBIT)
100
150
Interest Expense
20
25
Earnings Before Tax
80
125
Taxes (40%)
32
50
Net Income
48
75
Dividends
8
10
Additions to Retained Earnings
40
65
Explanation / Answer
Answer Share Price = Discounted Free Cash Flows/No of shares outstanding 36.063 Free Cash Flows = EBIT(1-T)+Depreciation-Changes in net working capital-capital expenditures Y1 Y2 Y3 Y4 EBIT 150 Given EBIT(1-Tax) i.e. 60% of EBIT 90 40% is the rate of tax, therefore 1-T = 60% Add:Depreciation 25 Given Less: Change in Net Working Capital -15 Refer working below Less: Capital Expenditure -75 [1000+x-25 = 1050 i.e. x = 75] Free Cash Flows = 25 increases by 10% in Y2 increases by 6% in Y3 increases by 4% in Y4 Discounted Free Cash Flow 25.00 21.90 17.11 296.62 360.63 (25*(1+10%))/(1+10%) (25*(1+6%))/(1+10%) (24.09*(1+4%))/(1+10%) perpetuity formula Added Value (17.11*(1+4%))/(10%-4%) 25+21.90+17.11+296.62 (dis cf*g)/(r-g) r=discount rate Working Note Change in Net Working Capital g=growth rate Net Working Capital in Y0 Net Working Capital in Y1 Accounts Receivable 200 250 Note: Cash is to be excluded Inventories 300 350 Less Accruals -50 -90 Less Accounts Payable -150 -195 300 315 Changes in net working capital 15 [315-300] This is to be reduced from operating cash flows
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