Shear Scissor Technologies (SST) earned $45 million in net income on $360 millio

Question

Shear Scissor Technologies (SST) earned $45 million in net income on $360 million in sales in Fiscal Year 2015, which just ended on 3/31/2016. From the income statement you compute that the gross profit margin was 58%, the operating profit margin was 31%, and the net profit margin was 12.5% in FY 2015.

SST estimates their cost of equity as 12% and their corporate WACC as 8.5%, and their average tax rate is 35%. In FY 2015, capital expenditures were $70 million and depreciation expense was $95 million, and there was an increase of $10 million in net working capital. Free cash flow is estimated to grow at a rate of 4% in FY 2016 and will continue to grow at that rate forever.

Book value of all debt is equal to $195 million, and the book value of equity is $350 million. The cash balance is $45 million. There are currently 110 million shares outstanding.

a) Compute NOPAT, Free Cash Flow, and EVA for for FY 2015.
b) Estimate the Enterprise Value of SST and the value of one share of stock as 3/31/2016

Please provide as detailed answer as possible. Thanks

Explanation / Answer

Part - A

The EBIT = 111,600,000.

NOPAT = EBIT*(1-tax rate) = 111,600,000 *(1-0.35) = $72,540,000

The Free cash flow is calcualted as follows;

Free cash flow = $140,000,000

EVA = Economic value added = NOPAT - (Capital * Cots of captal)

Capital = 70,000,000 and WACC = Cost of capital = 8.5% =0.085

EVA = 72,540,000 - (70,000,000*0.085) = $66,590,000

Part - B

Enterprise Value = Market Capitalization +Debt +Preferred Share Capital + Minority Interest - Cash and cash equivalents

EV = 350 + 195 - 45 = 500 Million = 500,000,000

Value of one share = 350,000,000/110,000,000 = 3.18 (Book Value of one share)

Desc Amount Comment Sales 360000000 COGS 151200000 Sales - Gross Profit Gross Profit 208800000 0.58* sales Operating expenses 97200000 Gross - EBIT Opertaing Profit (EBIT) 111600000 0.31 * sales

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