Universal Technologies, Inc.

William (Bill) Smith, CFO of Universal Technologies, Inc. (UT), has received an offer from Bigalow General Corporation (BG) to purchase the common stock of UT for the price of $20.00 per share. Based on this offer, Bill has asked you construct a valuation of UTs common stock.

Based upon this request you have constructed a set of projections for UT for years 2019 2023 (See Attached Appendix A). After 2023, you have determined that Free Cash Flows will grow at a constant rate or 4% per year. In addition to the projections, you have the following information about UT and the financial markets.

UT has a $1.5 billion Commercial Line of Credit that carries a variable interest rate priced at the Prime Rate of interest as published from time to time by the Wall Street Journal. UT has $1.2 billion of $1,000 par value bonds that carry a coupon interest rate of 5.75%, payable annually. The bonds mature 7 years from now, and currently sell in the secondary market at $887 per bond.

UT has issued $500 million of $100 par value perpetual preferred stock that carries a preferred dividend of 6.50%. UTs preferred stock currently sells in the secondary market at $92.50 per share.

UT has 68.5 million shares of common stock outstanding.

You have noted that the yield on the short-term Treasury Bill is 1.50%. You have estimated that the beta for UTs stock is 1.2 and that the anticipated stock market return is 11.25%.

In order to estimate the value of UTs stock, you have determined that you must calculate the future Free Cash Flows for UT, estimate UTs Weighted Average Cost of Capital and then use the Corporate Valuation Model to compute the value of UTs stock. Based upon your findings, Bill has requested that you recommend whether or not UT should accept BGs offer.

Appendix "A" Universal Technologies, Inc. Balance Sheet (in Millions of Dollars) 2018 Actual 2019 Est. 2020 Est. 2023 2021 Est. Est Assets Current Assets Cash $ $ $ $ $ $ Inventory Accounts Receivable 550 1,153 775 616 1,291 868 2,775 682 1,408 946 3,035 719 1,506 1,012 762 1,595 1,073 3,431 800 1,676 1,126 3,603 Total Current Assets 2,478 3,237 Long Term Assets Machinery, Plant & Equipment 2,225 2,492 2,716 2,905 3,081 3,235 Total Assets $4,703 $ 5,267 S 5,751 $ 5,143 $ 5,512 $ 6,837 Liabilities & Owner's Equity Current Liabilities Accounts Receivable $ $ $ $ $ $ Accruals 225 110 904 1,239 252 123 1,169 275 135 1,200 1,720 294 144 1,336 312 153 1,302 327 160 1,190 Line of Credit Total Current Liabilities 1,544 1,774 1,766 1,677 Long-term Bonds 1,200 1,200 1,200 1,200 1,200 1,200 Owner's Equity Preferred Stock Common Stock Retained Earnings Total Owner's Equity 500 1,500 500 1,500 264 2,254 500 1,500 523 2,523 500 1,500 831 2,831 500 1,500 1,169 3,169 500 1,500 1,546 3,546 1,960 3,960 Total Liabilities & Owner's Equity $ 4,703 $ 5,267 $ 5,751 $ 6,143 $ 6,512 $ 6,837 Statement of Income & Expenses (in Millions of Dollars) Sales $ $ $ $ $ 4,512 3,321 1,291 $ 6,705 5,029 Costs of Goods Sold Gross Profit Fixed Overhead EBITDA 5,165 3,874 1,291 547 744 277 5,630 4,223 1,408 569 5,024 4,518 1,506 592 914 1,676 5,385 4,789 1,596 615 981 526 640 839 Depreciation 1,036 359 677 EBIT Interest Expense 125 EBT Taxes (2596) 552 138 414 Net Income 317 $ 259 $ 308 $ 338 $ 377 $ Appendix "A" Universal Technologies, Inc. Balance Sheet (in Millions of Dollars) 2018 Actual 2019 Est. 2020 Est. 2023 2021 Est. Est Assets Current Assets Cash $ $ $ $ $ $ Inventory Accounts Receivable 550 1,153 775 616 1,291 868 2,775 682 1,408 946 3,035 719 1,506 1,012 762 1,595 1,073 3,431 800 1,676 1,126 3,603 Total Current Assets 2,478 3,237 Long Term Assets Machinery, Plant & Equipment 2,225 2,492 2,716 2,905 3,081 3,235 Total Assets $4,703 $ 5,267 S 5,751 $ 5,143 $ 5,512 $ 6,837 Liabilities & Owner's Equity Current Liabilities Accounts Receivable $ $ $ $ $ $ Accruals 225 110 904 1,239 252 123 1,169 275 135 1,200 1,720 294 144 1,336 312 153 1,302 327 160 1,190 Line of Credit Total Current Liabilities 1,544 1,774 1,766 1,677 Long-term Bonds 1,200 1,200 1,200 1,200 1,200 1,200 Owner's Equity Preferred Stock Common Stock Retained Earnings Total Owner's Equity 500 1,500 500 1,500 264 2,254 500 1,500 523 2,523 500 1,500 831 2,831 500 1,500 1,169 3,169 500 1,500 1,546 3,546 1,960 3,960 Total Liabilities & Owner's Equity $ 4,703 $ 5,267 $ 5,751 $ 6,143 $ 6,512 $ 6,837 Statement of Income & Expenses (in Millions of Dollars) Sales $ $ $ $ $ 4,512 3,321 1,291 $ 6,705 5,029 Costs of Goods Sold Gross Profit Fixed Overhead EBITDA 5,165 3,874 1,291 547 744 277 5,630 4,223 1,408 569 5,024 4,518 1,506 592 914 1,676 5,385 4,789 1,596 615 981 526 640 839 Depreciation 1,036 359 677 EBIT Interest Expense 125 EBT Taxes (2596) 552 138 414 Net Income 317 $ 259 $ 308 $ 338 $ 377 $