Firm Valuation Problem

Using the financial data for Stanley Products, Inc. and the assumptions below, complete a 3-year free cash flow (FCF) forecast.

• Sales will increase over the next three years at an annual rate of 10.5 percent.

• Cost of goods sold is projected to be 72 percent of sales for 2018. Beginning in 2019, the ratio is expected to deteriorate by 0.15 percentage points each year.
• Selling, general, and administrative expenses (SG&A) will be forecasted over the next 3 years using the historical relation to sales.
• Depreciation Expense will be forecasted over the next 3 years using the historical relation to sales.

• Capital Expenditures will be forecasted over the next 3 years using the historical relation to sales.
• Net Working Capital will be forecasted over the next 3 years using the historical relation to sales, with a 0.25 percentage point improvement each year, beginning in 2019.
• The tax rate is 37%.
• Free Cash Flow (FCF) beyond year 3 will grow at 5.0 percent forever.

• WACC is 9.0 percent.

	2018	2019	2020

As of today, Stanley Products stock was trading at about $34 per share, with approximately 985 million shares outstanding. Based on your FCF analysis, would you recommend purchasing the stock? Why or why not? (Be sure to show all work in support of your answer.)