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Question: You have the following information for Small Inc. for the current year (Y0). Assume there are 50M shares outstanding.
Income Statement (M$)
Y0
Y1
Sales
1400
Cost of Goods Sold
700
SG&A
200
Depreciation
100
Earnings Before Interest & Tax (EBIT)
400
Interest Expense
40
Earnings Before Tax
360
Taxes (40%)
144
Net Income
216
Dividends
Balance Sheet (M$)
Cash
Accounts Receivable
300
Inventories
500
Current Assets
900
Gross PPE
Accumulated Depn
Net Fixed Assets
TOTAL ASSETS
1,000
Accruals
25
Accounts Payable
150
Notes Payable
75
Current Liabilities
250
Long Term Debt
350
Common Stock
Retained Earnings
Total Liability & Equity
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.
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