Full Boat Manufacturing has projected sales of $124 million next year. Costs are expected to be...

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Full Boat Manufacturing has projected sales of $124 million nextyear. Costs are expected to be $74 million and net investment isexpected to be $14.9 million. Each of these values is expected togrow at 15 percent the following year, with the growth ratedeclining by 2 percent per year until the growth rate reaches 7percent, where it is expected to remain indefinitely. There are 6.5million shares of stock outstanding and investors require a returnof 12 percent return on the company’s stock. The corporate tax rateis 23 percent.
a. What is your estimate of the current stock price? (Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)
b. Suppose instead that you estimate the terminal value of thecompany using a PE multiple. The industry PE multiple is 14. Whatis your new estimate of the company’s stock price? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

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4.0 Ratings (552 Votes)


N	Year	1	2	3	4	5	6
g	Growth Rate		0.15	0.13	0.11	0.09	0.07	(CONSTANT GROWTH RATE TO PERPETUITY)
B=Previous years sales*(1+g)	Sales($ million)	$124	$142.60	$161.14	$178.86	$194.96	$208.61
C=Previous years Costs*(1+g)	Costs($ million)	$74	$85.10	96.16	106.74	116.35	124.49
D=Previous years investment*(1+g)	Net Investment ($ million)	$14.90	$17.14	$19.36	$21.49	$23.43	$25.07
E=B-C	Earning Before Taxes	$50	$58	$65	$72	$79	$84
F=E*(1-0.23) (Tax Rate =23%=.23)	Earning After Taxes	$38.50	$44.28	$50.03	$55.53	$60.53	$64.77
G=F-D	Free Cash Flow	$23.60	$27.14	$30.67	$34.04	$37.11	$39.70
	Horizon Value in Year 5	39.70/(R-0.07)
	R=Required return=12%=0.12
	Horizon Value in Year 5($million)	$794.06	(39.7/(0.12-0.07)
	N	CF	PV=CF/(1.12^N)
	Year	Cash Flow	Present Value
	1	$23.60	21.07142857
	2	$27.14	21.63584184
	3	$30.67	21.829019
	4	$34.04	21.63411704
	5	$37.11	21.05463176
(Horizon Value)	5	$794.06	450.5691197
		Total	557.7941579

A	Value of the Firm in $ million	$557.7941579
B	Number of share in million	6.50
C=A/B	Estimated Current Stock Price	$85.81


b	Terminal/Horizon value
	Earning in Year 5($ million)	$60.53
	Terminal/Horizon value	$847.45	(14*60.53)

	N	CF	PV=CF/(1.12^N)
	Year	Cash Flow	Present Value
	1	$23.60	21.07142857
	2	$27.14	21.63584184
	3	$30.67	21.829019
	4	$34.04	21.63411704
	5	$37.11	21.05463176
	5	$847.45	480.866378
		Total	588.0914162
D	Value of the Firm in $ million	588.0914162
E	Number of share in million	6.50
F=D/E	Estimated Current Stock Price	$90.48

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Full Boat Manufacturing has projected sales of $124 million nextyear. Costs are expected to be $74 million and net investment isexpected to be $14.9 million. Each of these values is expected togrow at 15 percent the following year, with the growth ratedeclining by 2 percent per year until the growth rate reaches 7percent, where it is expected to remain indefinitely. There are 6.5million shares of stock outstanding and investors require a returnof 12 percent return on the company’s stock. The corporate tax rateis 23 percent.a. What is your estimate of the current stock price? (Do notround intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)b. Suppose instead that you estimate the terminal value of thecompany using a PE multiple. The industry PE multiple is 14. Whatis your new estimate of the company’s stock price? (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)