Problem 1: You are leading a team that is working on a potential acquisition of a large private pharmaceutical company, Agile Bioscience. Agile has just concluded a large capital investment program and is poised for significant growth (10%/year) over the next three years (2021-2023). Your team thinks it can forecast Agile's financial performance over this period with a fairly high degree of accuracy. It is less clear what will happen after 2023, but your team thinks it is likely that Agile will resume its relatively stable long-term growth trajectory at 5%/year. The details of your team's projections for Agile have been summarized in the following table: 2020 2021 2022 2023 2024 on Year Forecasts ($ million) Sales $10,000.0 Growth Versus Prior Year EBIT % of sales = 20% $11,000.0 10.0% $2,200.0 $660.00 $1,540.00 $12,100.0 10.0% $2,420.0 $726.00 $1,694.00 $13,310.0 $13,975.5 10.0% 5.0% $2,662.0 $2,795.1 $798.60 $838.53 $1,863.40 $1,956.57 Less: Income Tax % = 30% NOPAT Plus: Depreciation Less: Capital Expenditures Less: Increase in NWC, % of Incr Sales 20% Free Cash Flow $200.0 $1,340.0 $220.0 $1,474.0 $242.0 $1,621.4 $133.1 $1,8235 You assume that capital expenditures and depreciation will offset each other. Assume that Agile's earnings will be equal to the net operating profit after taxes (NOPAT in the table above), and that it will continue its long-standing policy of paying 80% of earnings out as dividends| (distributed to 800 million shares of stock outstanding held by the founders and a private equity firm). You have been following another large pharmaceutical company that is publicly traded. It has a debt to equity ratio of 33 1/3%, its debt cost is 4% and its equity cost of capital is 12%. Use this similar company to estimate its asset (unlevered) cost of capital and use this to evaluate the value of Agile. Use this cost of capital with a range of plus or minus 1% to estimate the range of values that you might pay PER SHARE for Agile. (Assume valuation is at beginning of 2021 and that future earnings and dividends occur at year-ends.) (Hint: calculate earnings and dividends per share and then discount using dividend growth formula for terminal value.) Problem 1: You are leading a team that is working on a potential acquisition of a large private pharmaceutical company, Agile Bioscience. Agile has just concluded a large capital investment program and is poised for significant growth (10%/year) over the next three years (2021-2023). Your team thinks it can forecast Agile's financial performance over this period with a fairly high degree of accuracy. It is less clear what will happen after 2023, but your team thinks it is likely that Agile will resume its relatively stable long-term growth trajectory at 5%/year. The details of your team's projections for Agile have been summarized in the following table: 2020 2021 2022 2023 2024 on Year Forecasts ($ million) Sales $10,000.0 Growth Versus Prior Year EBIT % of sales = 20% $11,000.0 10.0% $2,200.0 $660.00 $1,540.00 $12,100.0 10.0% $2,420.0 $726.00 $1,694.00 $13,310.0 $13,975.5 10.0% 5.0% $2,662.0 $2,795.1 $798.60 $838.53 $1,863.40 $1,956.57 Less: Income Tax % = 30% NOPAT Plus: Depreciation Less: Capital Expenditures Less: Increase in NWC, % of Incr Sales 20% Free Cash Flow $200.0 $1,340.0 $220.0 $1,474.0 $242.0 $1,621.4 $133.1 $1,8235 You assume that capital expenditures and depreciation will offset each other. Assume that Agile's earnings will be equal to the net operating profit after taxes (NOPAT in the table above), and that it will continue its long-standing policy of paying 80% of earnings out as dividends| (distributed to 800 million shares of stock outstanding held by the founders and a private equity firm). You have been following another large pharmaceutical company that is publicly traded. It has a debt to equity ratio of 33 1/3%, its debt cost is 4% and its equity cost of capital is 12%. Use this similar company to estimate its asset (unlevered) cost of capital and use this to evaluate the value of Agile. Use this cost of capital with a range of plus or minus 1% to estimate the range of values that you might pay PER SHARE for Agile. (Assume valuation is at beginning of 2021 and that future earnings and dividends occur at year-ends.) (Hint: calculate earnings and dividends per share and then discount using dividend growth formula for terminal value.)
