Excess return period (ERP) is 4 years (Revenue growth rate will be 20%). After ERP, the revenue
Question:
Excess return period (ERP) is 4 years (Revenue growth rate will be 20%).
After ERP, the revenue growth rate will be 11.25% for year 5th and will drop to be constant at long-
term inflation rate from year 6th to forever.
Because the competitive landscape will be changing a lot in the future, we will not use the sustainable
growth rate for our calculation.
Beta is 2.
Tax rate is 22%.
Number of share outstanding currently is 1,500 M shares (same as a previous year).
Current market price of the company is $10 per share.
Forward EV/EBITDA of Peers average = 18.7X and S&P 500 = 16.31X.
Trailing EBITDA = 1.75 billion, Current EBITDA = 1.90 billion, Expected EBITDA = 2.00 billion.
Market risk premium is 5.7%.
There is no preferred stock in the company.
Nominal risk-free rate (Rf) is 5%.
Spread of the company bond over the nominal risk-free is 150 basis points (bps).
Use Book Value of long-term debt as the weight of debt and Market Capitalization as the weight of
equity.
Long-term inflation rate is 2.5%.
Revenue of the year 2007 is $9 billion.
Revenue of the year 2008 is $10 billion.
Average operating profit margin is 30% (constant rate every year).
Average depreciation rate (% of Revenue) is 5% (constant rate every year).
Average new investment rate (% of Revenue) is 10% (constant rate every year).
Average working capital (% of Increased revenue) is 12% (constant rate every year).
Cash is $0.3 billion.
Non-operating asset is $0.4 billion.
Long-term debt is $2.2 billion.
Total debt is $5 billion.
The optimal capital structure is 14.95%.
Market P/E = 10X, 10-year AVG earning yield gap = 4%.
Find the Company’s instance value based on the discounted free cash flow to firm (DFCFF) with Percent of Sale (POS) and make a recommendation.
Expert Answer:
The Companys instance value is 196 billion I recommend that the Company be valued at 196 billion WOR... View the full answer
