8) Use the table for the question(s) below FCF Forecast (S million) Year Sales G

Question

8) Use the table for the question(s) below FCF Forecast (S million) Year Sales Growth versus Prior Year EBIT (10% of Sales) Less: Income Tax (37%) Less Increase in NWC (12% of Change in Sales Free Cash Flow 2 290 7.4% 29.00 10.73 2.4 15.87 4 325.5 5.0% 32.55 12.44 1.86 18.65 240 270 12.5% 27.00 (9.99) 3.6 13.41 6.9% 31.00 11.47 2.4 17.13 Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1? A) $6.52 B) $11.74 C) $13.04 D) $23.48 Answer: Explanation: C) FCF5 = $18.65 million x (1 + 0.05) = $19.5825 million; V4= $19.5825 million/ (0.11-0.05)= $326.38 million; using a financial calculator, Vo $264.7655 million; Po = ($264.7655 million + 50-80) / 18 million = $13.04 Diff 2 Var: 50+

Explanation / Answer

First add 1 and 0.05, we get 1.05 , multiply 1.05 by 18.65 we get 19.5825..Write it down..

Subtract 0.05 from 0.11 we get 0.06..Write it down..

Divide 19.5825 by 0.06 we get 326.38

CF0=13.41, CF1=15.87,CF2=17.13,CF4=18.65+326.38..Compute NPV We will get 264.7655

Add 264.7655 with 50 and subtract 80 we will get 234.7655 write it down

divide 234.7655 by 18 we will get 13.04

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