4. Use a DCF model and the following data to estimate the per share value (in mi

Question

4. Use a DCF model and the following data to estimate the per share value (in millions, except shares out) Year 1 Year 2 Operating Income Depreciation Cap Ex Other Info Tax Rate Long Debt Pension Liability Shares Out 127.2 12 10 Year 3 Year 4 Year 5 142.4 150.5 128.8 12 12 136.4 12 12 12 12 12 21% 400 200 50 million Discount Rate 10% Terminal Growth | 4% Use the following data for questions 5 and 6 Stock Super Normal Growth Rate Years of Super Normal Growth 15% 12% 9% 5 10 5. What stock deserves a higher P/E multiple to trailing earnings given the data in this chart, which shows the rate and duration of super normal growth, before fading to a normal market rate of growth of 5%. Assume equal risk levels for each and no dividends If the market multiple is 18x trailing earnings, what would be today's fair P/Es (on trailing earnings) for each stock. Use our formula 6.

Explanation / Answer

Question 4:

First we calculate the present value of the future cash flows as shown in the table below:

Cash flow from year 6 onwards will grow infinitely at 4%. The PV of which is calculated as CF6/(r-g) = 94,792,000*1.04/(0.10-0.04) = 1,643,061,333.33

Net present value of future cash flows = 95,108,000/1.10 + 101,586,000/1.10^2 + 105,536,000/1.10^3 +111,935,000/1.10^4 + 94,792,000/1.10^5 + 1,643,061,333.33/1.10^5 =1,405,231,251.05

Now, we reduce the liabilties and divide by number of shares

Per share value = (1,405,231,251.05 - 400,000,000 - 200,000,000 )50,000,000

Per share value = 16.1046

Estimated value per share = $16.10 (Rounde to 2 decimals)

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Year 1 2 3 4 5 Operating Income 127200000 136400000 142400000 150500000 128800000 Less: Depreciation -12000000 -12000000 -12000000 -12000000 -12000000 Less: Capital expenditure -10000000 -11000000 -12000000 -12000000 -12000000 Income before taxes 105200000 113400000 118400000 126500000 104800000 Taxes at 21% -22092000 -23814000 -24864000 -26565000 -22008000 Net Income 83108000 89586000 93536000 99935000 82792000 Add back depreciation 12000000 12000000 12000000 12000000 12000000 Operating Cash flow 95108000 101586000 105536000 111935000 94792000

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