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Two Stage FCFF: Try It Apex Manufacturing has current sales of $50 million. It is expected to grow at 14% for the next 4

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Two Stage FCFF: Try It Apex Manufacturing has current sales of $50 million. It is expected to grow at 14% for the next 4 years. From year 5 onwards, the growth rate is expected to be a normal growth rate of 6%. During the growth stage, capital investment is expected to grow at 20%, while depreciation is expected to grow at 25% during this period. During the normal growth stage, depreciation will offset the capital investment needs. The EBIT margin will remain at 24% for the whole period. The working capital will remain at 20% of sales. Currently, the equity is $20 million and debt is $20 million and number of shares outstanding is 1 million. Cost of debt is 10%. The cost of debt during normal growth stage will fall to 9%. The capital investment last year was $2 million, and depreciation was $1.6 million. The risk-free rate is 5%, market risk premium is 7%, and beta during growth stage will be 1.4 and 1.1 during normal growth stage. Calculate the value per share using the FCFF model. 0 1 2 3 4 5 Sales growth rate 14% 14% 14% 14% 6% Capital investment growth rate 20% 20% 20% 20% 0% Depreciation growth rate 25% 25% 25% 25% 0% Working capital % 20% 20% 20% 20% 20% 20% EBIT margin 24% 24% 24% 24% 24% 24% Debt 20 Equity 20 Number of shares 1 Tax rate 20% 20% 20% 20% 20% 20% Sales 50 57 64.98 74.08 84.45 89.53 Capital investment 2 2.4 2.88 3.46 4.15 0.00 Depreciation 1.6 2.0 2.5 3.13 3.91 0.00 Working capital 10.00 11.40 13.00 14.82 16.89 17.90 EBIT 12.00 13.68 15.60 17.78 20.27 21.48

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