1. Summit Energy is an alternative energy producer. Your hedge fund is interested in investing into the company. As an analyst, you need to estimate firm value and its price per share using the NPV method and report it to the energy portfolio manager. So far you've successfully forecasted the following earnings for 2020-2022 (numbers are in millions). Actual earnings Forecasted earnings 2018 2019 2020 2021 2022 Revenues 25,650 24,368 25,220 26,481 26,746 Cost of goods sold 17,894 19,750 21,230 20,381 19,973 Gross Profit 7,756 4,618 3,990 6,101 6,773 SG&A 2,110 2,050 2,200 2,200 2.200 Depreciation 2,000 2,000 2,000 2,000 2,000 EBIT Tax expense (25%) Net income A. Calculate Summit's free cash flows for 2020-2022. Assume that annual net working capital represents 10% of revenues. In 2021 Summit plans to purchase new equipment for its new generation of wind mills for $200 million. No other purchases are planned in 2020 or 2022 B. Summit Energy's beta is 1.7. Calculate its expected rate of return if the market portfolio return is 12% and the risk free rate is 4% C. Calculate Summit's terminal value if free cash flows are expected to grow 2% perpetually starting 2023. Use its expected rate of return from question B as a discount rate D. Calculate Summit's NPV as of 2020. Use its expected rate of return from question B as a discount rate E. If Summit has 50 million shares outstanding and $200 million of debt, what is its estimated price per share? F. If Summit's stock is currently trading for $500, should your fund invest in the company?| 1. Summit Energy is an alternative energy producer. Your hedge fund is interested in investing into the company. As an analyst, you need to estimate firm value and its price per share using the NPV method and report it to the energy portfolio manager. So far you've successfully forecasted the following earnings for 2020-2022 (numbers are in millions). Actual earnings Forecasted earnings 2018 2019 2020 2021 2022 Revenues 25,650 24,368 25,220 26,481 26,746 Cost of goods sold 17,894 19,750 21,230 20,381 19,973 Gross Profit 7,756 4,618 3,990 6,101 6,773 SG&A 2,110 2,050 2,200 2,200 2.200 Depreciation 2,000 2,000 2,000 2,000 2,000 EBIT Tax expense (25%) Net income A. Calculate Summit's free cash flows for 2020-2022. Assume that annual net working capital represents 10% of revenues. In 2021 Summit plans to purchase new equipment for its new generation of wind mills for $200 million. No other purchases are planned in 2020 or 2022 B. Summit Energy's beta is 1.7. Calculate its expected rate of return if the market portfolio return is 12% and the risk free rate is 4% C. Calculate Summit's terminal value if free cash flows are expected to grow 2% perpetually starting 2023. Use its expected rate of return from question B as a discount rate D. Calculate Summit's NPV as of 2020. Use its expected rate of return from question B as a discount rate E. If Summit has 50 million shares outstanding and $200 million of debt, what is its estimated price per share? F. If Summit's stock is currently trading for $500, should your fund invest in the company?|
