Ginger Ale had sales of 300 million in 2013 Suppose you expe

Ginger Ale had sales of $300 million in 2013. Suppose you expect its sales to grow at a 10% rate in 2014, but that this growth rate will stay at the long-run growth rate for the apparel industry of 5% from 2015. Based on Ginger’s past profitability and investment needs, you expect EBIT to be 18% of sales, Net capital expenditure (=capital expenditure –depreciation) to be 8% of any increase in sales, and increases in net working capital requirements to be 10% of any increase in sales. The amount of invested capital is expected to be $200 million in 2015. If Ginger has $100 million in non-operating cash, the current market value of debt of $50 million, 25 million shares outstanding, a tax rate of 35%, and a weighted average cost of capital of 10%, what is your estimate of the per-share value of Ginger’s stock in early 2014 (=at the end of 2013)?

A. Less than $12

B. Higher than $12 but less than $15

C. Higher than $18 but less than $21

D. Higher than $21 but less than $24

Solution

For 2014

Sales=330

Ebit=.18×330=59.4

FCFF=EBIT (1-T)-capital expenditure-working capital inv

FCFF for fy14=38.61-2.4-3=33.21

Cost of cpmpany=fcff×(1+g)/((wacc-g)

=33.21*1.05/(.10-.05)

=697.41

Value at binning of 2014=697.41/1.1=634

Value of equity=value if company -mv of debt=634-50

=584

Value per share=584/25=23.36

Therefore option d