Question
Having just graduated from TWU, you land a lucrative financial analyst position at a large publicly-traded firm in the U.S., called Floor-Mart. During your first
Having just graduated from TWU, you land a lucrative financial analyst position at a large publicly-traded firm in the U.S., called Floor-Mart. During your first week on the job, the CEO stops by to welcome you onboard and learns that you are a big believer in measuring value in order to create value. Consequently, the CEO asks if you could:
- Carry out a DCF analysis to estimate value per share. For this task you will have to:
- Project revenues for the next two years
- Convert the revenues into EBIT
- Convert each years EBIT into FCFF
- Calculate a terminal value
- Discount the FCFFs and terminal value to PV using the WACC
- From the PV of assets, find the PV of equity
- Convert the PV of equity to value per share
- Calculate how much EVA (Economic Value Added) the company generated last year. One way to do this is to subtract the capital charge from last years NOPAT.
- Calculate how much MVA (Market Value Added) the firm has generated. Subtract invested capital from market value of the whole firm.
- Calculate what the price per share would be if the firm was trading at a forward-looking EV/EBITDA multiple of 7, which the CEO considers an appropriate multiple in the industry at this time. Forward EBITDA x 7 leads to EV, which is value of the whole firm. You are looking for value of equity per share.
Both external and internal size-ups have recently been carried out by one of your colleagues, with the resulting assumptions included in the information below:
- Floor-Marts debt is entirely in the form of bonds with a yield-to-maturity of 6.2%.
- Government bonds currently yield:
2-Year | 5-Year | 10-Year | 30 Year |
1.80% | 2.20% | 3.25% | 4.82% |
- The stock has a Beta of 1.4
- Revenues are expected to grow at a rate of 3.5% for the next two years, then settle into a 3.0% growth rate indefinitely (note that this is also the terminal growth rate for free cash flows).
- EBIT margins have averaged 6% for several years and are expected to remain the same.
- Depreciation is expected to grow at a rate of 3.0% annually.
- Working capital will increase at a rate of 2% of the increase in revenues.
- CAPEX was $3,500 in 2017 and will increase at a rate of 3.2% annually.
- The shares currently trade at $42.73
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