Question

You are valuing Soda City Inc. It has $132 million of debt, $77 million of cash, and 182 million shares outstanding. You estimate its cost of capital is 9.8%. You forecast that it will generate revenues of $726 million and $774 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 33%, tax rate is 24%, reinvestment rate is 46%, and terminal EV/FCFF exit multiple at the end of year 2 is 11. What is your estimate of its share price? Round to one decimal place.

Answer 1

	Year 1	Year 2	Terminal value (11 x FCFF year 2)
Revenue	726.00	774.00
Operating profit (33% of revenue)	239.58	255.42
Less : Tax (24% of Operating profit)	57.50	61.30
NOPAT	182.08	194.12
Less : Reinvestment (46% of NOPAT)	83.76	89.29
FCFF	98.32	104.82	1,153.07
Present value calculation	= 98.32 / (1+9.8%)^1	=104.82 / (1+9.8%)^2	=1153.07/ (1+9.8%)^2
Present value	89.54	86.94	956.43
Total value = 89.54 + 86.94 + 956.43
Total value = 1,132.91
Equity value = Total value + Cash - Debt
Equity value = 1,132.91 + 77 - 132
Equity value = 1077.91
Share price = 1077.91 / 182
Share price = 5.92