Question

Jess Co. expects to have sales of 138,477 next year, costs of 92,785, and net investment of 13,565. Each of these values is expected to grow at 15% for the next five years (T1 to T5), and then at 2% forever thereafter (Starting T6). The firm has 7,500 shares outstanding and investors require a 10% rate of return on their investment. Lastly, the firm has a 30% corporate tax rate. The comparable P/E for Jess Co. equals 19.5. Calculate the price per share using the P/E Multiple Approach for the terminal value. (Round to 3 decimals)

Answer 1

1- Calculating PV of Net Income.

2- PE = P/ EPS, EPS = Net Income / Total Shares

3- Sales for year2 = Year1 (1+.15) = 159,248.55, Year3 = Year 2 * (1+.15) similarly for Year5

Sales for year 6 (Growth rate of 2% = Year5 * (1+.02)

Using the same criteria for Net investments and costs.

4- Calculating Net Income as shown in the screen shot.

5- Calculate PV of Net Income for Year 1 to year 5 = NI_i / ( 1+R)ⁱ , where i = year

5- For year 6 calculate terminal value = NI Year 6 / ( R - g), R = 10% and g = 2%

6- Calculate PV of NI of Year 6 = Terminal Value / (1+R)^6 = 501,498.64

7- Sum all Present Values = 395,030.21

8- EPS = NI / Shares = 395,030.21/ 7500 = 52.67

9 - P = (PE) * EPS = 19.5 * 52.67 = 1,027.079