Reference no: EM133334030

Problem: Today is Dec 31, 2012. Peete Simmer plans to kick off the new year with a new growth strategy. By entering new markets, the company expects to grow sales by 5% for the next 5 years (through 2017). Thereafter firm sales are expected to return to the long-run industry growth rate of 3%. Sales in 2012 were $10M.

However, this new strategy will require added investment in capital expenditure. PP&E on Dec 31, 2012 was $10M. Management expects this to grow at 7% per year for the next 5 years, and then to grow in line with sales thereafter (i.e 3%).

With the entry into new markets, the company also expects a temporary worsening of working capital management. Peete's accounts receivables was 5% of sales in 2012. But by extending more generous credit to new customers, the A/R account is expected to jump to 6% of sales in 2013, then decrease by 0.2% each year thereafter until it reaches the 2012 level of 5% of sales, then stay constant there thereafter. The company will also try to maintain accounts payable at 20% of inventory.

The cost of goods sold has been 60% of sales historically and is expected to remain the same. Selling and other administrative expenses are 5% of sales historically and are expected to remain the same. The company maintains inventory at a constant 10% of COGS. Assume depreciation expense is embedded in COGS and SG&A.

(For simplicity, assume financial ratios make use of end of year balance sheet items)

Peete Simmer plans to maintain its target leverage of 0.25, with debt that pays 7% interest. Although Peete's equity does not trade publicly, its main competitor is publicly traded. Assume Peete and its main competitor have the same overall business risk. This competing firm is 40% debt financed, with costs of equity and debt at 17% and 9%, respectively. The corporate tax rate is 40%.

1). What is the value the firm today?

2) Find the price per share if the firm has 200,000 shares outstanding?