Question

You are valuing Soda City Inc. It has $150 million of debt, $70 million of cash, and 200 million shares outstanding. You estimate its cost of capital is 8.0%. You forecast that it will generate revenues of $740 million and $760 million over the next two years. Projected operating profit margin is 40%, tax rate is 20%, reinvestment rate is 60%, and terminal exit value multiple at the end of year 2 is 8. What is your estimate of its share price?

Answer 1

Value of Debt = D = $ 150 million, Cash = $ 70 million, Number of Shares Outstanding = N = 200 million

Cost of Capital = 8%, Forecasted Revenue: Year 1 = $ 740 million and Year 2 = $ 760 million. Operating Profit Margin = 40%, Tax Rate = 20%, Reinvestment Rate = 60%, Terminal Value Exit Multiple = 8

Year 1 Operating Profit (EBIT) = 0.4 x 740 = $ 296 million

Year 2 Operating Profit (EBIT) = 0.4 x 760 = $ 304 million

FCFF1 = EBIT x (1-Tax Rate) x (1-Reinvestment Rate) = 296 x (1-0.2) x (1-0.6) = $ 94.72 million

FCFF2 = EBIT x (1-Tax Rate) x (1-Reinvestment Rate) = 304 x (1-0.2) x (1-0.6) = $ 97.28 million

Terminal Value = Exit Multiple x Year 2 EBIT = 8 x 296 = $ 2368 million

Total Enterprise Value (EV) = Present Value (PV ) of FCFF1 + PV of FCFF2 + PV of Terminal Value (all discounted at cost oc of capital) = 94.72 / (1.08) + 97.28 / (1.08)^(2) + 2368 / (1.08)^(2) = $ 2201.28 million

Value of Equity = E = EV - D + Cash = 2201.28 - 150 + 70 = $ 2121.28 million

Estimated Share Price = E / N = 2121.28 / 200 = $ 10.6064 ~ $ 10.61