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