Question

A firm will have net income of $0 for three years, $50M in the fourth year. If investors expect a retention ratio of 50% and shares outstanding equal to 1000, what is the year 4 total equity value and today's value per share using a forward multiple? Cost of equity (Ke) is 10%.

Other information:

Forward EV/E 18x

P/E TTM 15x

TTM P/B 5x

TTM P/S 5.5x

P/E Forward 14x

Forward EV/B 4.5x

Net Income $20M

Book $100M

Mkt V of Equity $200M

Answer 1

P/E Forward= 14x

Projected earnings in year 4= $50 million

Thus, year 4 total Equity Value= $50 million x 14= $700 million

Discounting year 4 Equity value, using a discount rate 10% (Ke= 10%)

= 700 / [(1+ 0.10) ⁴]

= $478 million

No. of shares outstanding= 1000

Current Value per share (i.e. Share Price) = (478x 1,000,000)/ 1,000= $478,000

[Not sure whether No. of shares outstanding= 1000 or 1000 thousand.

If No. of shares outstanding= 1000 thousand, then

Current Value per share (i.e. Share Price) = (478x 1,000,000)/ 1,000,000= $478]