Reference no: EM132043784

Question: You have the following information for Small Inc. for the current year (Y0). Assume there are 50M shares outstanding.

Income Statement (M$)	Y0	Y1
Sales	1400
Cost of Goods Sold	700
SG&A	200
Depreciation	100
Earnings Before Interest & Tax (EBIT)	400
Interest Expense	40
Earnings Before Tax	360
Taxes (40%)	144
Net Income	216
Dividends	100

Balance Sheet (M$)	Y0	Y1
Cash	100
Accounts Receivable	300
Inventories	500
Current Assets	900
Gross PPE	400
Accumulated Depn	300
Net Fixed Assets	100
TOTAL ASSETS	1,000
Accruals	25
Accounts Payable	150
Notes Payable	75
Current Liabilities	250
Long Term Debt	350
Common Stock	100
Retained Earnings	300
Total Liability & Equity	1,000

1. Forecast the income statement and balance sheet for Y1. Assume: Sales and accounts receivable grow by 25%; cost of goods sold, inventory and accounts payable grow 20%; and SG&A grows 10%. Interest expense will fall to 25M. The following accounts will not change (same dollar amount): depreciation expense, dividends, cash, accruals, notes payable, long-term debt, common stock. The firm will need 150M more in gross PPE. Use the cash account to balance the balance sheet.

2. Estimate the stock price for Small Inc. using discounted cash flows. Assume Small Inc.  grows at 5% after year 1, the cost of capital is 15% and cash is a non-operating asset.You will need the free cash flow for year 1 and the horizon value as part of the solution.

3. Large Inc. has a forward P-E multiple of 4.5x. Use this to estimate the stock price for Small Inc.