Question

5. Compute the equity share price for LED Light Co. using the information below: LED Light Co. expects of $975 million in 2018. Operating margin = 33%, Net profit margin = 9%, Interest rate = 6%, Tax rate = 35% Depreciation expense = $25 million, CAPEX = $15 million , no changes in NWC Dividend yield = 3.5%, Dividend payout rate = 40% Risk free rate = 2%, E(Rm) = 10%, shares out = 60 million Total debt (book value) = $1245 million, interest rate = 6%, WACC =9% Cash on hand = $110 million, Equity beta = 1.25, Sales 975 million, constant growth 3%

Answer 1

EBIT = $975 × 33%

= $321.75

EBIT of company is $321.75 million.

NOPAT = EBIT × (1 - Tax rate)

= $321.75 × (1 - 35%)

= $209.1375

NOPAT of company is $209.1375 million.

Expected Free cash flow = NOPAT + Depreciation - Capex - Change in working capital

= $209.1375 + $25 - $15 - $0

= $219.1375 million.

Expected Free cash flow is $219.1375 million

Value of firm = Expected FCF / (WACC - Constant Growth)

= $219.1375 / (9% - 3%)

= $3,652.30

Value of firm is $3,652.30.

Value of equity = Value of firm - Value of debt + Value of cash

= $3,652.30 - $60 + $110

= $3,702.30

Value of equity - $3,702.30 million

Number of share outstanding = 1,245 million.

Share price = $3,702.30 / 1,245

= $2.97

equity share price for LED Light Co is $2.97.