BIOMET VALUATION PROBLEM

Three$-$Stage FCFE Model

Biomet Inc., designs, manufactures and markets reconstructive and trauma devices, and reported earnings per share of $$0\mathrm{.}56$ in $1993,$ on which it paid no dividends. $($It had revenues per share in $1993$ of $$2\mathrm{.}91).$ It had capital expenditures of $$0\mathrm{.}13$ per share in $1993$ and depreciation in the same year of $$0,08$ per share. The working capital was $60\%$ of revenues in $1993$ and will remain at that level from $1994$ to $1998,$ while earnings and revenues are expected to grow $17\%$ a year. The earnings growth rate is expected to decline linearly over the following five years to a rate of $5\%$ in $2003.$ During the high growth and transition periods, capital spending and depreciation are expected to grow at the same rate as earnings, but are expected to offset each other when the firm reaches steady state. Working capital is expected to drop from $60\%$ of revenues during the $19941998$ period to $30\%$ of revenues after $2003.$ The firm has no debt currently, but plans to finance $10\%$ of its net capital investment and working capital requirements with debt.

The stock is expected to have a beta of $1\mathrm{.}45$ for the high growth period $(1994-1998),$ and it is expected to decline to $1\mathrm{.}10$ by the time the firm goes into steady state $($in $2003).$ The treasury bond rate is $7\%.$ Market risk premium is $5\mathrm{.}5\%.$ Estimate the value per share, using the FCFE model. ASSUME YOU ARE AT THE START OF THE YEAR $1994.$