20. An analyst has collected the following information about Franklin Electric:
ID: 2799216 • Letter: 2
Question
20. An analyst has collected the following information about Franklin Electric: Projected EBIT for the next year $300 million. Projected depreciation expense for the next year $50 million Projected capital expenditures for the next year $100 million. Projected increase in operating working capital next year $60 million. Tax rate 40%. WACC 10%. Cost of equity 13%. Market value of debt and preferred stock today $500 million. Number of shares outstanding today 20 million. The company's free cash flow is expected to grow at a constant rate of 6 percent a year. The analyst uses the corporate value model approach to estimate the stock's intrinsic value. What is the stock's intrinsic value today? 62.50Explanation / Answer
Next Year:
EBIT = $300 million
Depreciation = $50 million
Capital Expenditure = $100 million
Increase in NWC = $60 million
tax rate = 40%
FCF1 = EBIT*(1-tax) + Depreciation - Capital Expenditure - Increase in NWC
FCF1 = $300 million * (1-0.40) + $50 million - $100 million - $60 million
FCF1 = $70 million
WACC = 10%
growth rate, g = 6%
Value of Firm = FCF1 / (WACC - g)
Value of Firm = $70 million / (0.10 - 0.06)
Value of Firm = $70 million / 0.04
Value of Firm = $1,750 million
Value of Equity = Value of Firm - Value of Debt and Preferred Stock
Value of Equity = $1,750 million - $500 million
Value of Equity = $1,250 million
Intrinsic Value of stock = Value of Equity / Number of shares outstanding
Intrinsic Value of stock = $1,250 million / 20 million
Intrinsic Value of stock = $62.50
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