Question
Jasper Holdings Ltd achieved sales of $400 million in 2019. Analysts expect Jasper Holdings Ltds sales to grow at 10% p.a. in 2020 but this
Jasper Holdings Ltd achieved sales of $400 million in 2019. Analysts expect Jasper Holdings Ltds sales to grow at 10% p.a. in 2020 but this growth will slow by 1% p.a. to a long-run growth rate of 5% p.a. by 2025. EBIT is expected to be 9% of sales, increases in net working capital requirements to be 7% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be 6% of any increase in sales. Jasper Holdings Ltd has $45 million in cash, $66 million in long-term debt, and 13 million shares outstanding. Assume a tax rate of 30% and a weighted average cost of capital of 11%.
Jaspers Free Cash Flows:
($ millions) | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
Sales | 400 | 440.0 | 479.6 | 518.0 | 554.2 | 587.5 | 616.9 |
Growth versus prior year |
| 10.00% | 9.00% | 8.00% | 7.00% | 6.00% | 5.00% |
EBIT (9% of Sales) |
| 39.6 | 43.2 | 46.6 | 49.9 | 52.9 | 55.5 |
Less Income Tax (30% EBIT) |
| 11.9 | 12.9 | 14.0 | 15.0 | 15.9 | 16.7 |
Less Net Investment (6% Sales) |
| 2.4 | 2.4 | 2.3 | 2.2 | 2.0 | 1.8 |
Less: Inc. in NWC (7% Sales) |
| 2.8 | 2.8 | 2.7 | 2.5 | 2.3 | 2.1 |
FREE CASH FLOW |
| 22.5 | 25.1 | 27.6 | 30.2 | 32.7 | 35.0 |
- Using the free cash flow forecast and the assumed long-term growth rate of 5% p.a. after year 2025, calculate Jasper Holdings Ltds terminal enterprise value in year 2025. (4 marks)
- Calculate current Jaspers enterprise value. (6 marks)
- What is your estimate of the value per share of Jasper in early 2020? (4 marks)
- What is your estimate of Jaspers stock value per share in part (c) above if the free cash flow at the end of year 2020 is $22.5 million and such free cash flow will grow by 5% p.a. from year 2020 onwards? (6 marks)
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