RJ Industries Inc. (RJIN)

RJIN is a new start up firm created by a private equity spin-off from Third Capital Ventures a private equity firm. The firm is known for its high tech communications/ artificial intelligence capability and is based in Austin, Texas.

At this point Future Dynamic Inc. (high-tech consulting firm) estimated that corporate sales will likely come in at 105,985, 121,380, 144,975, 156,320, and 169,845 units respectively for the next five years if the company adheres to an average sales price of $490 per unit for the first three years and $525 in years four and five. Thereafter growth in unit sales are expected to be 2% indefinitely. Due to the nature of the sub-sector of the high-tech industry the firm resides in, the company concentrates its efforts on a single product line.

After the results of an internal company analysis by the Corporate Finance Staff, it has been determined the company can manufacture its product line at a variable cost per unit expected to be $297 growing at 2.5% per year for the first 5 years and 4.5% per year indefinitely thereafter while overall fixed costs are estimated to be $8,887,000 annually for the first year and grow 2% per year indefinitely.

The necessary capital expenditures are projected to be $36.2 million upfront and due to the nature of the investments that RJIN makes, it is deemed by the IRS to be depreciated on the five-year MACRS schedule. In the terminal phase of growth, investment strategy will change to a series of three year time horizons for all investments allowing straight-line depreciation to be used which will result in an average depreciation charge per year of $1.25 Million per year indefinitely.

Working capital to support sales will be 11.25% of yearly sales for the first 5 years and then is projected to grow 4% per year thereafter.

The marginal corporate income tax rate is expected to average 31.5% barring any changes to the corporate tax code and the projected annual growth rate of Free Cash Flow (FCF) in its terminal phase is expected to be approximately 2.25% indefinitely. Historically the debt-equity ratio has consistently been 120% for which RJIN’s current debt level is $50 Million with an average maturity of 5 years and an interest rate on this debt of 6.75%. The equity beta is deemed to be 1.3875 while the risk-free rate of return is given as 2.95% and the market risk premium is 8.5%. Currently there are 3,572,000 shares of common stock outstanding.

You have been hired by RJIN to determine the following:

1. Operating Cash Flow for each of the first 5 years and the Terminal Phase

2. Free Cash Flow for each of the first 5 years and the Terminal Phase

3. What the Asset Beta (Industry Bets) is that RJIN can use in its analysis

4. What the appropriate discount rate is for RJIN in valuing the firm and hence stock price

5. What the asset value of the firm is (RJIN)

6. What the equity value of the firm is (RJIN)

7. What the appropriate stock price is for RJIN

8. Make recommendations to improve the stock price

Please use separate worksheet tabs for Data Entry, Operating Cash Flow, Free Cash Flow, Asset Beta, Discount Rate, Asset Value, Equity Value, Stock Price, and Recommendations.

Please show formulas in cells as well.