Question

New Millenium Company earned $2.3 million in net income last year. It took depreciation deductions of $290,000 and made new investments in working capital and fixed assets of $96,000 and $360.000, respectively.

A. What was New Millenniums Free cash flow last year.

B. Suppose that the company's free cash flow is expected to grow at 4% per year forever. If investors require a return of 9% on Millennium stock, what is the present value of Millenium's Future free cash flows?

C. New Millennium has 3.5 million shares of common stock outstanding. What is the per share value of the company's common stock.

d. What is the​ company's P/E ratio based on last​ year's earnings​ (i.e., trailing​ earnings)?

e. What is the​ company's P/E ratio based on next​ year's earnings​ (assuming that earnings grow at the same rate as free cash​ flow).

Answer 1

A. FCF = Net Income + Depriciation - Investment in Working Capital - Investment in Capital Expenditure

= 2,300,000 + 290,000 - 96,000 - 360,000 = 2,134,000

B. Growth Rate g =4%; Rate of Return r =9%

PV of Future Free Cash fLow = FCF*(1+g)/(r-g) = 2.134 * (1+4%)/(9%-4%) = 44.3872M

C. 3.5 M Shares have value of 44.3872M so Per Share Value = 44.3872 / 3.5 = 12.68 per share

D. Last Year Earning = 2.3M, So Earning per share = 2.3 /3.5 = 0.657; P/E = 12.68 / 0.657 = 19.3

E. Next Year Earning = 2.3*(1+4%)= 2.392, and EPS= 2.392 / 3.5 = 0.6834; P/E = 12.68 / 0.6834 = 18.6