Kenneth Cole (KCP) had sales of $524.6 million in 2005. Based on KCP's past profitability and investment needs, you expect EBIT to be 9% of sales, increases in net working capital requirements to be 10% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be8% of any increase in sales. KCP has $98.4 million in cash, $3.2 million in debt, 21.8 million shares outstanding, a tax rate of 37%, and a weighted average cost of capital of 11%.

a. Suppose you believe KCP's initial revenue growth rate will be between 4% and 11%* (*with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these forecasts?

b. Suppose you believe KCP's EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth at 9% with growth slowing in equal steps to 4% by year 2011)?

c. Suppose you believe KCP's weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP's initial revenue growth and EBIT margin at 9% with growth slowing in equal steps to 4 % by year 2011)?

d. What range of share prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously? That is:

	Case 1	Case 2
Revenue growth rate	4%	11%*
EBIT margin	7%	10%
WACC	12%	10%

Answer rating: 100% (QA)

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