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Two-Stage FCFE Model An Extended Application




Dionex Corporation, a leader in the development and manufacture of ion chromography systems (used to identify contaminants in electronic devices), reported earnings per share of $2.02 in 1993, and paid no dividends. These earnings are expected to grow 14% a year for five years (1994 to 1998) and 7% a year after that. The firm reported depreciation of $2 million in 1993 and capital spending of $4.20 million, and had 7 million shares outstanding. The working capital is expected to remain at 50% of revenues, which were $106 million in 1993, and are expected to grow 6% a year from 1994 to 1998 and 4% a year after that. The firm is expected to finance 10% of its capital expenditures and working capital needs with debt. Dionex had a beta of 1.20 in 1993, and this beta is expected to drop to 1.10 after 1998. (The treasury bond rate is 7%.);A. Estimate the expected free cash flow to equity from 1994 to 1998, assuming that capital expenditures and depreciation grow at the same rate as earnings.;B. Estimate the terminal price per share (at the end of 1998). Stable firms in this industry have capital expenditures which are 150% of depreciation, and maintain working capital at 25% of revenues.;C. Estimate the value per share today, based upon the FCFE model.


Paper#35189 | Written in 18-Jul-2015

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