Question
If there are 500 million shares outstanding, use the following information to find a fair value for Galaxy Interiors stock using the Free Cash Flow
If there are 500 million shares outstanding, use the following information to find a fair value for Galaxy Interiors stock using the Free Cash Flow (FCF) model.
GALAXY INTERIORS INCOME STATEMENT | |||
($ in millions) | |||
NET SALES | $ 35,000 | ||
COST OF GOODS SOLD | $ 17,500 | ||
DEPRECIATION | $ 2,500 | ||
EARNINGS BEFORE INTEREST AND TAXES (EBIT) | $ 15,000 | ||
INTEREST EXPENSE | $ 1,300 | ||
TAXABLE INCOME (EARNINGS BEFORE TAXES; EBT) | $ 13,700 | ||
TAXES (0.30) | $ 4,110 | ||
NET INCOME | $ 9,590 | ||
GALAXY INTERIORS BALANCE SHEET (PAST & CURRENT) | ||||||
($ IN MILLIONS) | ||||||
PAST YR | CURRENT YR | PAST YR | CURRENT YR | |||
CURRENT ASSETS | 5500 | 6700 | CURRENT LIABILITIES | 2200 | 3000 | |
(NET) FIXED ASSETS | 25000 | 27000 | LONG TERM DEBT | 9300 | 9700 | |
TOTAL ASSETS | 30500 | 33700 | TOTAL EQUITY | 19000 | 21000 | |
TOTAL LIAB & EQUITY | 30500 | 33700 |
Also, assume the following:
- Free cash flow (FCF) will grow at 2.5%
- Galaxy's equity beta is 1.50
- Risk-free rate is 3% and market return is 13%
- Currently, Galaxy is not paying any dividends
- Book value of total debt is equal to the market value of debt
- further note that, FCF (Free cash flow) = EBIT*(1-t) + depreciation - NCS - change in NWC
#1. What beta value should we use for the FCF model?
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