Question
Kenneth Cole (KCP) had sales of $524.6 million in 2005. Based on KCP's past profitability and investment needs, you expect EBIT to be 9% of
Kenneth Cole (KCP) had sales of $524.6 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 be8% of any increase in sales. KCP has $98.4 million in cash, $3.2 million in debt, 21.8 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:
Case 1 | Case 2 | |
Revenue growth rate | 4% | 11%* |
EBIT margin | 7% | 10% |
WACC | 12% | 10% |
Please show all work for calculations and Excel formulas. Thanks you
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started