Flathead Lake Manufacturing
Income Statement 2007
Sales	$ 9,300,000
Cost of the sold	5,750,000
Depreciation	550,000
Gross Profit	3,000,000
S&A Expenses	2,200,000
EBIT	800,000
Interest Expense	200,000
Income before Tax	600,000
Taxes	375,000
Net Income	$ 225,000
Flathead Lake Manufacturing Blalance Sheet	2007	2006
Cash	$ 50,000	$ 40,000
Account Receivable	570,000	600,000
Inventory	530,000	460,000
Total Current Assets	1,150,000	1,100,000
Fixed Assets	2,050,000	1,400,000
Total Assets	$ 3,200,000	$ 2,500,000
Account Payable	$ 320,000	300,000
Bank Loans	480,000	400,000
Total Current Liabilities	800,000	700,000
Bond Payable	1,500,000	1,000,000
Total Liabilities	2,300,000	1,700,000
Common Stock (200,000 Shares)	200,000	200,000
Retained Earnings	700,000	600,000
Total equity	900,000	800,000
Total Liabilities and Shareholders' equity	3,200,000	2,500,000

For the balance sheet, treat bank loans as short term loans and bonds payable as long term loans. The market value of debt is equal to the sum of bank loans and bonds payable.

You can find EBIT and depreciation information from the financial statement, you can also use the information in financial statements to calculate changes in net working capital. In addition to the financial statements, you also know the following information: The tax rate is 62.5%, the capital expenditure of 2007 is 40,000. The interest rate on firms debt is 10%, the target capital structure for debt is equal to the sum of short term loan and long term loan divided by total assets, the rest is in equity.

A comparable firm with similar capital structure has a beta of 1.2 and a price to ebitda ratio of 10. The risk free rate is 2% and a market risk premium is 8%. Analyst forecast that the firm is going to grow by 30% for the next two years.

Given the information, what is the firms intrinsic equity value at the end of 2007 based on forecast using FCFF approach (calculate TV using multiplier approach)? If you assume the firm is going to grow at a constant rate of 3% after the forecast period, what is the intrinsic equity value if you calculate terminal value using constant growth rate formula?

Hint: Remember for calculating changes in current assets and changes in current liability, exclude changes in cash and short term investment as well as changes in short term debt.

2

You forecast a company to have a ROE of 15%, a dividend payout ratio of 30%. What is the companys forecasted growth using ROE and Retained earning approach? If you also know currently the company has a price of $30, and you forecast the company to have a $1 earnings per share. If firms with similar risks in the industry have a PE ratio of 27 with an estimated earnings growth rate of 12%, is the company overvalued or undervalued based on PEG approach?