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Question;Problem 9-18;Heavy Metal Corporation is expected to generate the;following free cash flows over the next;five years:;Year 1 2 3 4 5;FCF ($;million) 53 68 78 75 82;After then, the free cash flows are expected to grow at the;industry average of 4% per year. Using the discounted free cash flow model and;a weighted average cost of capital of 14%;a. Estimate;the enterprise value of Heavy Metal.;b. If Heavy;Metal has no excess cash, debt of $300 million, and 40 million shares;outstanding, estimate its share price.;Problem 9-20;Sora;Industries has 60 million outstanding shares, $120 million in debt, $40;million in cash, and the following projected free cash flow for the next four;years;Year;0;1;2;3;4;Earnings;and FCF Forecast ($ million);1;Sales;433.0;468.0;516.0;547.0;574.3;2;Growth versus Prior Year;8.1%;10.3%;6.0%;5.0%;3;Cost of;Goods Sold;(313.6);(345.7);(366.5);(384.8);4;Gross;Profit;154.4;170.3;180.5;189.5;5;Selling;General, and Administrative;(93.6);(103.2);(109.4);(114.9);6;Depreciation;(7.0);(7.5);(9.0);(9.5);7;EBIT;53.8;59.6;62.1;65.2;8;Less: Income Tax at 40%;(21.5);(23.8);(24.8);(26.1);9;Plus: Depreciation;7.0;7.5;9.0;9.5;10;Less: Capital Expenditures;(7.7);(10.0);(9.9);(10.4);11;Less: Increase in NWC;(6.3);(8.6);(5.6);(4.9);12;Free;Cash Flow;25.3;24.6;30.8;33.3;a.;Suppose;Sora?s revenue and free cash flow are expected to grow at a 5% rate beyond;year 4. If Sora?s weighted average;cost of capital is 10%, what is the value of Sora?s stock based on this;information?;b.;Sora?s;cost of goods sold was assumed to be 67% of sales. If its cost of goods sold;is actually 70% of sales, how would the estimate of the stock?s value change?;c.;Let?s;return to the assumptions of part (a) and suppose Sora can maintain its cost;of goods sold at 67% of sales. However, now suppose Sora reduces its selling;general, and administrative expenses from 20% of sales to 16% of sales. What;stock price would you estimate now? (Assume no other expenses, except taxes;are affected.);d.;Sora?s;net working capital needs were estimated to be 18% of sales (which is their;current level in year 0). If Sora can reduce this requirement to 12% of sales;starting in year 1, but all other assumptions remain as in part (a), what;stock price do you estimate for Sora? (Hint: This change will have the;largest impact on Sora?s free cash flow in year 1.);Problem 9-21;Consider;the valuation of Kenneth Cole Productions in Example 9.7.;a.;Suppose;you believe KCP?s initial revenue growth rate will be between 7% and 11%;(with growth slowing in equal steps to 4% by year 2011.) What range of share;prices for KCP is consistent with these forecasts?;b.;Suppose;you believe KCP?s EBIT margin will be between 7% and 10% of sales. What range;of share prices for KCP is consistent with these forecasts (keeping KCP's;initial revenue growth at 9%)?;c.;Suppose;you believe KCP?s weighted average cost of capital is between 10% and 12%.;What range of share prices for KCP is consistent with these forecasts;(keeping KCP's initial revenue growth and EBIT margin at 9%)?;d.;What;range of share prices is consistent if you vary the estimates as in parts;(a), (b), and (c) simultaneously?;Problem 9-23;Suppose;that in January 2006, Kenneth Cole Productions had EPS of $1.65 and a book;value of equity of $12.05 per share.;a. "Using;the average P/E multiple in Table 9.1, estimate KCP?s;share price.;b.;What;range of share prices do you estimate based on the highest and lowest P/E;multiples in Table 9.1?;c. Using the average price to book value;multiple in Table 9.1, estimate KCP?s share price. d. What range of share prices do you;estimate based on the highest and lowest price to book value multiples in;Table 9.1?;Problem 9-24;Suppose that in January 2006, Kenneth Cole Productions had;sales of $518 million, EBITDA of $55.6 million, excess cash of $100 million, $3;million of debt, and 21 million shares outstanding.;a. Using the average enterprise value;to sales multiple in Table 9.1, estimate KCP?s share price.;b. What range of share prices do you;estimate based on the highest and lowest enterprise value to sales multiples in;Table 9.1?;c. Using the average enterprise value;to EBITDA multiple in Table 9.1, estimate KCP?s share price.;d. What range of share prices do you;estimate based on the highest and lowest enterprise value to EBITDA multiples;in Table 9.1?;Problem 9-25;In addition to footwear, Kenneth Cole Productions designs;and sells handbags, apparel, and other accessories. You decide, therefore, to;consider comparables for KCP outside the footwear industry.;Kenneth;Cole information;EPS 1.65;EBITDA55.60;Cash 100.00;Debt 3.00;Shares;outstanding 21;a. Suppose;that Fossil, Inc., has an enterprise value to EBITDA multiple of 9.73 and a P/E;multiple of 18.4. What share price would you estimate for KCP using each of;these multiples, based on the data for KCP in Problems 23 and 24?;b. Suppose;that Tommy Hilfiger Corporation has an enterprise value to EBITDA multiple of;7.19 and a P/E multiple of 17.2. What share price would you estimate for KCP;using each of these multiples, based on the data for KCP in Problems 23 and 24?;Problem;9-26;Consider the following data for the airline industry in;early 2009 (EV = enterprise value, BV = book value,NM = not meaningful because;divisor is negative). Discuss the usefulness of using multiples to value an;airline.;Company Name Market;Cap EV EV/Sales EV/EBITDA EV/EBIT P/E P/Book;Delta Air Lines 4,799.60 16,887.60 0.7 15.0 NM;NM NM;AMR Corp. 1,296.50 8,743.50 0.4 17.5 NM;NM NM;JetBlue Airways 1,246.90 3,834.90 1.1 10.4 25.7;NM 1.0x;Continental;Airlines 1,216.80 4,506.80 0.3 14.7 NM NM NM;UAL Corp. 701 6,192.00 0.3;NM NM NM NM;Air Tran;Holdings 651.3 1,354.70 0.5 21.7 NM NM 2.3;SkyWest 588.7 1,699.70 0.5 3.8 7.5 6.5 0.5;Hawaiian 257.1 262.1 0.2 1.7 2.7 3.6;NM;Pinnacle;Airlines 44 699.7 0.8 6.6 10.1 3.4 1.0

 

Paper#50926 | Written in 18-Jul-2015

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