Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of
Question:
Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted:
2018 | 2019 | 2020 | 2021 | |
Depreciation | 30,000 | 35,000 | 40,000 | 45,000 |
EBIT | 100,000 | 125,000 | 150,000 | 175,000 |
Investment in Operating Assets | 30,000 | 40,000 | 50,000 | 60,000 |
The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 12%. The expected tax rate is 35% in the next two years and 40% after that.
a) Calculate the free cash flow for each of the next four years.
b) After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today?
c) Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year for four years. After that time, the firm's free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model, what is the value of the stock?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw