Fincher Manufacturing has projected sales of $145.2 million next year. Costs are

Question

Fincher Manufacturing has projected sales of $145.2 million next year. Costs are expected to be $81.1 million and net investment is expected to be $15.1 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 5.6 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.

  

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.)

  

  

Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 12. 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.)

  

Fincher Manufacturing has projected sales of $145.2 million next year. Costs are expected to be $81.1 million and net investment is expected to be $15.1 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 5.6 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.

Explanation / Answer

Earnings = (sales-costs)*(1-tax rate) = (145.-81.1)*(1-0.35) = 41.535m

1)

WHERE

2)

Terminal p/e is 12

i.e stock value at end of year 5 = 12*earnings of year 5 = 12*65.304 = 783.64

required return = 14.00% Year Previous year Cash flow Cash flow growth rate Cash flow current year stock price Total Value Discount factor Discounted value 0 -15.1 1 0 0% 41.535 41.535 1.14 36.43421053 2 41.535 15% 47.76525 47.76525 1.2996 36.75380886 3 47.76525 13% 53.9747325 53.9747325 1.481544 36.43140703 4 53.9747325 11% 59.91195308 59.91195308 1.68896016 35.47268579 5 59.91195308 9% 65.30402885 998.2187267 1063.522756 1.925414582 552.3603931 Long term growth rate= 7% Value of FIRM = Sum of discounted value= 697.45 Value of stock= Firm value/shares o/s= 124.55

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