Following is a four-year forecast for Torino Marine.
|
Year
|
2012
|
2013
|
2014
|
2015
|
|
Free cash flow ($ millions)
|
$-52
|
$76
|
$92
|
$112
|
a. Estimate the fair market value of Torino Marine at the end of 2011. Assume that after 2015, earnings before interest and tax will remain constant at $200 million, depreciation will equal capital ex- penditures in each year, and working capital will not change. Torino Marine's weighted-average cost of capital is 11 percent and its tax rate is 40 percent.
b. Estimate the fair market value per share of Torino Marine's equity at the end of 2011 if the company has 40 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $250 million.
c. Now let's try a different terminal value. Estimate the fair market value of Torino Marine's equity per share at the end of 2011 under the following assumptions:
(1) Free cash flows in years 2012 through 2015 remain as stated earlier.
(2) EBIT in year 2015 is $200 million, and then grows at 5 percent per year forever.
(3) To support the perpetual growth in EBIT, capital expenditures in year 2016 exceed depreciation by $30 million, and this dif- ference grows 5 percent per year forever.
(4) Similarly, working capital investments are $15 million in 2016, and this amount grows 5 percent per year forever.
d. Lastly, let's try a third terminal value. Estimate the fair market value of Torino Marine's equity per share at the end of 2011 under the following assumptions:
(1) Free cash flows in years 2012 through 2015 remain as stated earlier. EBIT in year 2015 will be $200 million.
(2) At year-end 2015, Torino Marine has reached maturity, and its equity sells for a "typical" multiple of year 2015 net income. Use 12 as a typical multiple.
(3) At year-end 2015, Torino Marine has $250 million of interest- bearing liabilities outstanding at an average interest rate of 10 percent.
The following three problems test your knowledge of the chapter appendix.