1. Making Sense of Stock Price As of March 27, 2023, Waste Management (stock ticker: WM)'s stock price is $154.42 per share. Waste Management, Inc. (WM) NYSE - Nasdaq Real Time Price. Currency in USD 154.42 -0.04 (-0.03\%) As of 03:07PM EDT. Market open. Summary To assess whether the stock is over/undervalued, we aim to estimate the share price using Discounted Free Cash Flow approach. Following is Waste Management's sales forecast for the next five years along with the current year of 2023. In addition, based on the company's past profitability and investment needs, we assume the followings: - EBIT is 15.8% of sales. - Tax rate is 21.6% of EBIT. - Accounts Receivable is expected to be 15.1% of sales. - Accounts Payable is expected to be 16.1% of sales. - No inventory is required. - Capital expenditure is expected to be 11.5% of sales. - Depreciation is expected to be 10.6% of sales. (a) To estimate free cash flows (FCF) for years 1 through 5 , fill the following table. (b) After year 5 (year 2028), both sales revenue and free cash flows are expected to grow at a long-run rate of 2.5% every year forever. The firm-specific discount rate is 6%. What is the enterprise value today? (c) In current balance sheet, the firm has $351 million in cash, $24,503 million in debt, and 408 million shares outstanding. What is the share price? (d) Based on your estimate in (c), do you conclude that the current market price of $154.42 is fair? Or, is the stock over/undervalued? (e) Suppose that the long-run growth rate in part (b) is 3% rather than 2.5% per year. With this growth rate, how much would a share be worth? (Other than the growth rate, there is no change in the discount rate and balance-sheet items). 1. Making Sense of Stock Price As of March 27, 2023, Waste Management (stock ticker: WM)'s stock price is $154.42 per share. Waste Management, Inc. (WM) NYSE - Nasdaq Real Time Price. Currency in USD 154.42 -0.04 (-0.03\%) As of 03:07PM EDT. Market open. Summary To assess whether the stock is over/undervalued, we aim to estimate the share price using Discounted Free Cash Flow approach. Following is Waste Management's sales forecast for the next five years along with the current year of 2023. In addition, based on the company's past profitability and investment needs, we assume the followings: - EBIT is 15.8% of sales. - Tax rate is 21.6% of EBIT. - Accounts Receivable is expected to be 15.1% of sales. - Accounts Payable is expected to be 16.1% of sales. - No inventory is required. - Capital expenditure is expected to be 11.5% of sales. - Depreciation is expected to be 10.6% of sales. (a) To estimate free cash flows (FCF) for years 1 through 5 , fill the following table. (b) After year 5 (year 2028), both sales revenue and free cash flows are expected to grow at a long-run rate of 2.5% every year forever. The firm-specific discount rate is 6%. What is the enterprise value today? (c) In current balance sheet, the firm has $351 million in cash, $24,503 million in debt, and 408 million shares outstanding. What is the share price? (d) Based on your estimate in (c), do you conclude that the current market price of $154.42 is fair? Or, is the stock over/undervalued? (e) Suppose that the long-run growth rate in part (b) is 3% rather than 2.5% per year. With this growth rate, how much would a share be worth? (Other than the growth rate, there is no change in the discount rate and balance-sheet items)
