You have been provided the following information on CEL Inc., a manufacturer of high-end stereo systems. In
Question:
You have been provided the following information on CEL Inc., a manufacturer of high-end stereo systems.
In the most recent year, which was a bad one, the company made only \($40\) million in net income. It expects next year to be more normal. The book value of equity at the company is \($1\) billion, and the average return on equity over the previous 10 years (assumed to be a normal period) was 10%.
The company expects to make \($80\) million in new capital expenditures next year. It expects depreciation, which was \($60\) million this year, to grow 5% next year.
The company had revenues of \($1.5\) billion this year, and it maintained a noncash working capital investment of 10% of revenues. It expects revenues to increase 5% next year and working capital to decline to 9.5% of revenues.
The firm expects to maintain its existing debt policy (in market value terms). The market value of equity is \($1.5\) billion, and the book value of equity is \($500\) million. The debt outstanding (in both book and market terms) is \($500\) million.
The cost of equity for the firm is 9%.
a. Estimate the FCFE next year.
b. Estimate the value of the equity assuming that the firm can grow 5% a year in perpetuity.
Step by Step Answer:
Investment Valuation Tools And Techniques For Determining The Value Of Any Asset
ISBN: 9781118011522
3rd Edition
Authors: Aswath Damodaran