Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful
ID: 2772536 • Letter: B
Question
Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons.
Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.
B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years:
After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no non-operating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate B&C's intrinsic value of equity and intrinsic per share price. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent.
Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Round your answers to two decimal places. Round ROE to one decimal place.
Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Round your answers to the nearest cent.
The range of prices:
from $ to $
Explanation / Answer
Present Value of Equity = $ 25,447,035.55
Per Share Value of Equity = $ 50.89
working
Free Cash Flows of B&C
Year 1 = 1,000,000
Year 2 = 1,050,000
Year 3 = 1,208,000
Year 4 = 1,329,000
Year 5 = 1,462,000
After year 5 FCF expected to grow at constant rate of 7%
WACC of the firm = 12%
FCF in Year 6 = 1,462,000 * 1.07 = 1,564,340
Present value of FCF in year 6 at constant growth rate = 1,564,340/0.12 – 0.07 = 1,564,340/0.05
= 31,286,800
Present Value of Free Cash Flows = 1,000,000/1.12 + 1,050,000/1.12^2 +1,208,200/1.12^3 + 1,329,000/1.12^4 + 1,462,000/1.12^5 + 31,286,800/1.12^5
The denominator values reduce to
1.12^2 = 1.2544,1.12^3 = 1.404928, 1.12^4 = 1.5735194, 1.12^5 = 1.7623417
Substituting the values
Present Value of Free Cash Flows = 1,000,000/1.12 + 1,050,000/1.2544 +1,208,200/1. 404928 + 1,329,000/1.5735194+ 1,462,000/1.7623417 + 31,286,800/1.7623417
Present Value = 892857.14+837053.57+859972.90+844603.50+829578.06+17,752,970.38
= 29,447,035.55
Present Value of the Firm = 29,447,035.55
Total Debt Outstanding = 4,000,000
Present Value of Equity = PV of Firm – Total Debt = 29,447,035.55 – 4,000,000 = $ 25,447,035.55
Per Share Value of Equity = $ 25,447,035.55 / 500,000 = $ 50.89
Abercombe
Gunter
B & C
D/A
29.41%
15.92%
36.36%
P/E
15.45
17.25
19.57
Market /Book
2.429
2.25
2.83
ROE
15.7%
13.1%
18.6%
P/FCF
20.86
21.26
25.45
Range of Estimated Prices for B&C using those of Abercombe and Gunter
B & C
Abercombe
Estimated Price
Earnings Per Share
2.60
PE Ratio
15.45
40.17
Book Value
18.00
Market/Book
2.429
43.72
FCF
2
Price / FCF
20.86
41.72
B & C
Gunter
Estimated Price
Earnings Per Share
2.60
PE Ratio
17.25
44.85
Book Value
18.00
Market/Book
2.25
40.50
FCF
2
Price / FCF
21.26
42.52
Range of Prices of B & C based on values of Abercombe and Gunter = $ 40.17 to $ 44.85
working
Abercombe
D/A = 35/119 = 29.4117 or 29.41%
P/E = 34/2.2 = 15.45
Market/Book = Share Price / Book Value = 34/14 = 2.4285 or 2.429
Total Earnings = EPS * No of Shares = 2.20 * 6 Million = 13.2 Million
Total Equity = Total Assets – Total Debt = 119 – 35 = $ 84 Million
ROE = 13.2/84 * 100 = 15.7142
P/FCF = 34/1.63 = 20.86
Gunter
D/A = 50/314 = 0.1592 or 15.92%
P/E = 54/3.13 = 17.25
Market/Book = Share Price / Book Value = 54/24 = 2.25
Total Earnings = EPS * No of Shares = 3.13 * 11 Million = $ 34.43 Million
Total Equity = Total Assets – Total Debt = 314 – 50 = $ 264 Million
ROE = 34.43/264 * 100 = 13.05%
P/FCF = 54/2.54 = 21.26
B & C
Intrinsic Price = $ 50.89
D/A = 4/11 = 36.3636 or 36.36%
P/E = 50.89/2.60 = 19.57
Market/Book = Share Price / Book Value = 50.89/18 = 2.827 or 2.83
Total Earnings = EPS * No of Shares = 2.60 * 500000 = $ 1.3 Million
Total Equity = Total Assets – Total Debt = 11 – 4 = $ 7 Million
ROE = 1.3/7 * 100 = 18.57%
P/FCF = 50.89/2 = 25.445 or 25.45
Abercombe
Gunter
B & C
D/A
29.41%
15.92%
36.36%
P/E
15.45
17.25
19.57
Market /Book
2.429
2.25
2.83
ROE
15.7%
13.1%
18.6%
P/FCF
20.86
21.26
25.45
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