Question

You need to estimate the intrinsic value of Frenchie Apparel (on a per share basis).

A. Construct a DCF model. We estimate that next year’s revenues are 1,000,000 and projected to grow at 10% each year until year 4 (years 1-3). The EBITDA is 45% of the year’s revenue, and the estimated depreciation expense is 100,000 a year, and is not expected to change over time. The firm does not anticipate having any NWC or CAPEX needs in the foreseeable future. After the third year, we believe that firm’s fcf will grow at 5% indefinitely. Frenchie has a WACC of 13%, has 1 million in cash, 3 mil in total debt, and 100,000 shares outstanding. The current tax rate is 21%. What is the price per share using your DCF model?

Answer 1

	Year 1	Year 2	Year 3
Revenue (grows 10% till year 3)	1000000	1100000	1210000
EBITDA (45% of revenue)	450000	495000	544500
Depreciation	100000	100000	100000
EBIT	350000	395000	444500
Tax rate	21%	21%	21%
NOPAT = EBIT(1 - tax rate)	276500	312050	351155
FCF = NOPAT + Depreciation	376500	412050	451155

From year 4 FCF will grow at 5%

=> FCF of year 4 = FCF of year 3*1.05 = 47370.75

So the terminal value CF (i.e. after that there is a constant growth) on Year 3 = FCF of year 4/(WACC - growth) = 47370.75/(0.13 - 0.05) = 592134.375

Price per share according to DCF is =( PV of Year 1 FCF + PV of Year 2 FCF + PV of Year 3 FCF + PV of Terminal Value )/Nember of outstanding shares

WACC will be the dicount rate for future CFs

Price per share = ( 376500/(1.13^1) + 412050/(1.13^2) + 451155/(1.13^3) + 592134.375/(1.13^3) )/100000

Price per share = 13.789