Firm Valuation Problem - B

Using the financial data for DSG, Inc. and the assumptions below, complete a 3-year free cash flow (FCF) forecast.

• Sales will increase over the next three years at an annual rate of 10 percent.

• Gross profit margin is projected to be 31.5 percent for 2018. Beginning in 2019, the ratio is expected to deteriorate by 0.15 percentage points each year.
• Selling, general, and administrative expenses (SG&A) will be 22.5 percent of sales for the next 3 years.
• Depreciation Expense will be forecasted over the next 3 years using the historical relation to sales.

• Capital Expenditures will be forecasted over the next 3 years using the historical relation to sales.
• Net Working Capital will be forecasted over the next 3 years using the historical relation to sales, with a 0.25 percentage point improvement each year, beginning in 2019.
• The tax rate is 38%.
• Free Cash Flow (FCF) beyond year 3 will grow at 5.0 percent forever.

• WACC is 10.0 percent.

	2018	2019	2020

As of today, DSGs stock was trading at about $35 per share, with approximately 123 million shares outstanding. Based on your FCF analysis, would you recommend purchasing the stock? Why or why not? (Be sure to show all work in support of your answer.)