• Excess return period (ERP) is 4 years (Revenue growth rate will be 20%).

• After ERP, the revenue growth rate will be 11.25% for year 5th and will drop to be constant at long-

  term inflation rate from year 6th to forever.

• Because the competitive landscape will be changing a lot in the future, we will not use the sustainable

  growth rate for our calculation.

• Beta is 2.

 

• Tax rate is 22%.

• Number of share outstanding currently is 1,500 M shares (same as a previous year).

• Current market price of the company is $10 per share.

• Forward EV/EBITDA of Peers average = 18.7X and S&P 500 = 16.31X.

• Trailing EBITDA = 1.75 billion, Current EBITDA = 1.90 billion, Expected EBITDA = 2.00 billion.

• Market risk premium is 5.7%.

• There is no preferred stock in the company.

• Nominal risk-free rate (Rf) is 5%.

• Spread of the company bond over the nominal risk-free is 150 basis points (bps).

• Use Book Value of long-term debt as the weight of debt and Market Capitalization as the weight of

  equity.

• Long-term inflation rate is 2.5%.

• Revenue of the year 2007 is $9 billion.

• Revenue of the year 2008 is $10 billion.

• Average operating profit margin is 30% (constant rate every year).

• Average depreciation rate (% of Revenue) is 5% (constant rate every year).

• Average new investment rate (% of Revenue) is 10% (constant rate every year).

• Average working capital (% of Increased revenue) is 12% (constant rate every year).

• Cash is $0.3 billion.

• Non-operating asset is $0.4 billion.

• Long-term debt is $2.2 billion.

• Total debt is $5 billion.

• The optimal capital structure is 14.95%.

• Market P/E = 10X, 10-year AVG earning yield gap = 4%.

Find the Company’s instance value based on the discounted free cash flow to firm (DFCFF) with Percent of Sale (POS) and make a recommendation.
 

Key Financial Ratios/Year 2007 2008 Industry (2008) Current Ratio 0.5 0.6 0.7 D/A 0.8 0.9 0.7 Gross Profit Margin 55% 57% 52% EBIT Margin 30% 31% 30% Net Profit Margin 3% 4% 3% Asset Turnover 1.76 1.84 1.8 Inventory Turnover 5.78 6.7 5.9 Receivable Turnover 31 32 28 ROE 12% 14% 11% ROA 8% 5% 4%