GrandPreex Inc. is an all-stock corporation that manufactures consumer goods. Sa
ID: 2525969 • Letter: G
Question
GrandPreex Inc. is an all-stock corporation that manufactures consumer goods. Sales are expected to be $500 million over the course of this year (realized at the end of this year), and are projected to grow at 10% annual rate over the following two years. After that point, sales will stabilize. Management estimates that cash costs will be 60% of revenue in each year. To achieve these sales projections, total investment in plant and equipment will have to be $40 million this year (again, paid out at year end), $45 million next year, and will level off at $50 million thereafter. Depreciation charges are expected to match investment outlays in each of these years GrandPreex is in the 34% tax bracket. The required return on GrandPreex's assets is 16% [This is rol. The firm has 10 million shares outstanding, currently trading at $65 per share. There are no costs of financial distress. Would you say that GrandPreex's shares are fairly priced?Explanation / Answer
Statement of Projected Profit/ Loss: Year 1 Year 2 Year 3 ($ million) ($ million) ($ million) Sales 500 550 605 Cash Cost 300 330 363 PBDT 200 220 242 Depreciation 40 45 50 PBT 160 175 192 Tax @ 34% 54.4 59.5 65.28 PAT 105.6 115.5 126.72 Add: Depreciation 40 45 50 Net Operating Profit After Tax 145.6 160.5 176.72 Rate of return on Company's assets is 16% Present Value of NOPAT discounted at Company's ROR @ 16% Year 1 125.52 Year 3 119.28 Year 3 113.22 Total 358.01 No of Shares outstanding in Mn 10 Computed Value of Share (358.01/10) 36 Current trading price of share 65 Since the Company's shares are trading at 65$ per share as compared to 36$ Hence, the conmpany's share is overpriced.
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