An aggressive financial planner who claims to have a superior method for picking undervalued stocks is courting one of your clients. The planner claims that the best way to find the value of a stock is to divide EBITDA by the risk - free bond rate. The planner is urging your client to invest in NewMarket, Inc. The planner says that NewMarket’s EBITDA of $ 1,580 million divided by the long - term government bond rate of 7 percent gives a total value of $ 22,571.4 million. With 318 million outstanding shares, NewMarket’s value per share found by using this method is $ 70.98. Shares of NewMarket currently trade for $ 36.50.
A. Provide your client with an alternative estimate of NewMarket’s value per share based on a two - stage FCFE valuation approach. Use the following assumptions:

• Net income is currently $ 600 million. Net income will grow by 20 percent annually for the next three years.
• The net investment in operating assets (capital expenditures less depreciation plus investment in working capital) will be $ 1,150 million next year and grow at 15 percent for the following two years.
• Forty percent of the net investment in operating assets will be financed with net new debt financing. NewMarket’s beta is 1.3; the risk - free bond rate is 7 percent; the equity risk premium is 4 percent.
• After three years, the growth rate of net income will be 8 percent and the net investment in operating assets (capital expenditures minus depreciation plus increase in working capital) each year will drop to 30 percent of net income.
• Debt is, and will continue to be, 40 percent of total assets. NewMarket has 318 million shares outstanding.

B. Criticize the valuation approach that the aggressive financial planner used.