Question 2 A portfolio manager has recently taken a long position in XYZ Plc's stocks, and wants to know whether this stock is still worth holding. She requests a sell-side analyst to provide an estimate of the stock's twelve month forward price target. The analyst decides to use the Free Cash Flow to the Firm (FCFF) valuation model, and collects the following information for the year just ended: .Earnings: 130m . Sales: 1,300m Depreciation: 50m Investment in fixed capital: 90m Interest expense: 55m The working capital has increased from 35m at the beginning of the year to 55m at the year-end Effective tax rate: 20% Current market value of the outstanding debt: 900m Number of shares outstanding: 10m The company's target capital structure is 35% debt and 65% equity. Before-tax cost of debt: 6% Risk free rate: 4.5% Market risk premium: 790 The stock's beta: 1 . . The stock's current P/E (price-to-earnings) multiple is 18 The analyst forecasts that the FCFF and Sales will grow at 8% per annum over the next three years. Due to uncertainty beyond this three-year forecast horizon, the analyst decides to estimate the terminal value (at the forecast horizon) by using the sector's historic-average EV/Sales (Enterprise Value-to-Sales) multiple of 2