Manufacturing Ltd. has projected sales of $145 million next year. Costs including depreciation are expected to be $81 million and net investment (incl. working capital investment and capital spending less depreciation) is expected to be $15million. Each of these values is expected to grow at 14% the following year with the growth rate declining by 2% per year until the growth rate reaches 6% where it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding and investors require a return of 13% return on co.'s stock. The corporate tax rate is 40%. There is no debt outstanding. a. What is the estimate of the current stock price? b. Suppose instead you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 11. What is the new estimate of co.'s stock price?

Manufacturing Ltd. has projected sales of $145 million next year. Costs including depreciation are expected to be $81 million and net investment (incl. working capital investment and capital spending less depreciation) is expected to be $15million. Each of these values is expected to grow at 14% the following year with the growth rate declining by 2% per year until the growth rate reaches 6% where it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding and investors require a return of 13% return on co.'s stock. The corporate tax rate is 40%. There is no debt outstanding. a. What is the estimate of the current stock price? b. Suppose instead you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 11. What is the new estimate of co.'s stock price?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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