The Churgin Corp. had sales of $310 million this year, costs were $185 million and net...

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The Churgin Corp. had sales of $310 million this year, costswere $185 million and net investment was $55 million. Each of thesevalues is project to grow at 10% per year for the next 5 years,afterwards these values will grow at 4% indefinitely. There are10.25 million shares outstanding and investors require a 9% rate ofreturn on their investment. The corporate tax rate is 25%. Use thegrowing perpetuity formula to estimate the terminal value,calculate the current price per share of stock. (Round to 2decimals)

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3.9 Ratings (513 Votes)

FCFF = (sales-costs)*(1-tax rate)-capex = (310-185)*(1-0.25)-55=38.75m

	WACC=	9.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	38.75	10.00%	42.625		42.625	1.09	39.1055
2	42.625	10.00%	46.8875		46.8875	1.1881	39.46427
3	46.8875	10.00%	51.57625		51.57625	1.295029	39.82633
4	51.57625	10.00%	56.733875		56.733875	1.41158161	40.19171
5	56.733875	10.00%	62.4072625	1298.071	1360.478263	1.538623955	884.21752
	Long term growth rate (given)=	4.00%			Value of Enterprise =	Sum of discounted value =	1042.81

Terminal value = 1298.071 m

Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year

Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Stock price = enterprise value/number of shares = 1042.81/10.25=101.74

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Transcribed Image Text

The Churgin Corp. had sales of $310 million this year, costswere $185 million and net investment was $55 million. Each of thesevalues is project to grow at 10% per year for the next 5 years,afterwards these values will grow at 4% indefinitely. There are10.25 million shares outstanding and investors require a 9% rate ofreturn on their investment. The corporate tax rate is 25%. Use thegrowing perpetuity formula to estimate the terminal value,calculate the current price per share of stock. (Round to 2decimals)