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Kenneth Cole (KCP) had sales of $500.6 million in 2005. Based on KCP's past profitability and investment needs, you expect EBIT to be 9%
Kenneth Cole (KCP) had sales of $500.6 million in 2005. Based on KCP's past profitability and investment needs, you expect EBIT to be 9% of sales, increases in net working capital requirements to be 10% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be 8% of any increase in sales. KCP has $96.7 million in cash, $3.5 million in debt, 20.7 million shares outstanding, a tax rate of 37%, and a weighted average cost of capital of 11%. a. Suppose you believe KCP's initial revenue growth rate will be between 4% and 11%* (*with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these forecasts? b. Suppose you believe KCP's EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth at 9% with growth slowing in equal steps to 4% by year 2011)? c. Suppose you believe KCP's weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth and EBIT margin at 9% with growth slowing in equal steps to 4% by year 2011)? d. What range of share prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously? That is:
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