Question
Peoples Office Supplies is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and
Peoples Office Supplies is a nationwide retail chain that offers office supplies and office furniture. Company management has decided that, from both a competitive and a cost-cutting standpoint, Peoples should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals, bond and linen paper, and other products. To accomplish this objective, Peoples is considering the purchase of Pennsylvania Paper, a manufacturer of paper products and notebooks. A five-year income forecast for Pennsylvania is given, along with other pertinent information. Vanguard plans to keep Pennsylvanai's debt-equity ratio at its current level [Use spreadsheet Valuation Workbook provided]
Five-Year Forecast ($ MM)
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
Revenue | 957.9 | 972.2 | 986.8 | 1,001.6 | 1,016.6 |
Cost of goods sold | 862.1 | 875.0 | 888.1 | 901.4 | 915.0 |
SG&A | 67.0 | 68.1 | 69.1 | 70.1 | 71.2 |
EBIT | 28.7 | 29.2 | 29.6 | 30.0 | 30.5 |
Interest expense | 12.5 | 13.4 | 13.8 | 14.1 | 14.4 |
EBT | 16.2 | 15.7 | 15.8 | 16.0 | 16.1 |
Taxes | 5.5 | 5.3 | 5.4 | 5.4 | 5.5 |
Net Income | 10.7 | 10.4 | 10.5 | 10.5 | 10.6 |
Other projections: | |||||
Change in net working capital | (5.7) | (5.8) | (5.9) | (6.0) | (6.1) |
Capital expenditures | 28.7 | 29.2 | 80.3 | 62.2 | 30.5 |
Depreciation | 52.7 | 53.5 | 54.3 | 55.1 | 55.9 |
Tax rate 34.0% |
| ||||
Book value of debt ($MM) | 192.3 | ||||
Book value of equity ($MM) | 364.9 | ||||
Share price ($) | 10.5 | ||||
Beta | 0.95 | ||||
Shares outstanding (MM) | 51.5 | ||||
Interest rate on company debt | 6.5% | ||||
Current bond yields on similarly rated companies | 6.1% | ||||
10-year T-bond rate | 5.5% | ||||
Inflation | 2.5% | ||||
Market risk premium | 6.0% |
Calculate the equity value in total and per share of Pennsylvania Paper using the discounted cash flow method (show all your calculations for credit).
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