FCF and valu end of 2018. Management after then, profit costs the ation. Financial information for Atlantic Stores is given below. Assume it is the ment expects net sales to increase 15 percent in 2019 and 10 percent in 2020; net sales growth is expected to slow down to 4% a year. Management also believes the gross margin will improve permanently to 47% by next year. Meanwhile, selling and administrative are expected to rise by only 10% in each of the next two years, after which they will remain at ratio-to-sales reached in 2020. The company's effective tax rate is expected to be 28 percent antic Stores currently has S10 milion of net working capital (which includes excess cash of $450k). In future, management expects net working capital exclusive ofexcess cash to be about 20% of sales. Net fixed assets at year-end 2018 are $30 million. Management expects to invest $10 million during 2019 and another $5 million in 2020 in plant and equipment to enable the firm to meet sales projections (these expenditures cover both the amounts need to replace depreciated assets and provide additional capacity). These investments will increase annual depreciation to $3.4m in 2019 and to $3.7m in 2020. After 2020 net fixed asset turnover will stabilize at 1.5x, and depreciation will be 10% of beginning-of-year net fixed assets. Prepare pro forma income statements for 2019-2021 (for simplicity, assume interest expense remains constant at its 2018 level). a. b. Calculate (firm) free cash flow for the years 2019-2021. Value Atlantic Stores' equity assuming a discount rate of 1 i% and a total debt at the end of 2018 of $12 million. Compare and contrast Atlantic Stores' value under (a) the projected growth assumptions given above and (b) the value obtained under the assumption that after 2021, Atlantic Stores' market is competitive Based on each of the two valuations obtained in part c. above, and assuming excess cash is used to pay down debt, find Atlantic Stores' market value debt et capital ratio at the end of 2018, as well as its (trailing) AMV/EBITDA and P/E multiples.! (Be sure to do both the perpetuity with growth and the competitive markets scenarios.) d. You have identified comparables to Atlantic Stores, which indicate that it should trade at a trailing AMV/EBITDA of 6.5x and a P/E of 11.5x. Answering with numbers, show what the AMV/EBITDA and P/E valuation multiples value would be when applied to Atlantic Stores. e. Conclude by stating a range of values for Atlantic Stores' stock price today and explaining why you have reached this conclusion. f. AMV is Adjusted Market Value (or Enterprise Value): the value of the entire firm excluding (excess) cash if any Trailing" ratios have numbers from the most recent income statement in the denominator (in contrast, leading ratio use analyst projections for the future) Atlantic Stores Income Statement for 2018 (thousands) Net Sales Cost of goods sold $45,000 $25,000 $20,000 Gross margin Operating expenses: Sales and administrative Depreciation Operating income Interest Earnings before tax Income taxes Net income $12,000 $2,500 $5,500 $1,250 $4,250 $1,190 $3,060 Shares outstanding: 5 million
