1. You have been given the attached information on the ABC Company. ABC expects sales to grow by 40 percent in 2015 and operating costs should increase in proportion to sales. Fixed assets were being operated at 60 percent of capacity in 2014, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during 2014. The company plans to finance any external funds needed as 40 percent notes payable and 60 percent common stock. The interest rate is 9 percent; base interest expense on the debt at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding.

Information on the Crum Company:

                          2014    

Sales                   $1,000.00

Operating costs            800.00                    

EBIT                    $ 200.00

Interest                    15.00                    

EBT                     $ 185.00

Taxes (40%)                 74.00                     

Net Income              $ 111.00

Dividends (60%)             66.60                    

Add'n to R.E.           $   44.40                    

Current Assets          $ 700.00

Net fixed Assets           300.00                    

Total assets            $1,000.00                    

A/P and Accruals        $ 50.00

N/P                        200.00

Long-term debt (LTD)       100.00   

Common stock               150.00

Retained earnings          500.00

Total Liab & Equity     $1,000.00

Calculate the additional funds needed (AFN) using the percentage of sales method and prepare Year 2015 pro-forma balance sheet (Ignore any financing feedback effects.)

2. ABC’s the most recent free cash flow (FCF0) is $60 million. The free cash flow is expected to grow at a rate of 30 percent and 15 percent in the next two years. After two years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 13% and the weighted average cost of capital (WACC) is 10%. ABC currently has 100 million common shares of outstanding. Kay’s book value of debt and preferred stock is $20 million and $30 million respectively and the book values of debt and preferred stock are very close to market value of debt and preferred stock. ABC has $10 million marketable securities (beyond normal operation) and $ 5 million of minority investment in another company.

Calculate ABC’s stock price using FCF based valuation model without using computer software like “Excel”.

Bonus Question

Answer the following questions using “IBIS World” database.

What are the past 5 years (2010 to 2014)’ revenue growth rates of “Global Car & Automobile Manufacturing” industry?

What are the next 5 years (2016 to 2020)’ revenue growth rates of “Global Car & Automobile Manufacturing” industry?