SunTrust Telecom, Inc.(STT) provides centralized telephone systems in remote areas of underdeveloped countries.
As a result of a recent world-wide economic downturn, the price of STT's stock price has declined dramatically to around $30.
Given the current economic outlook, however, and STT's long-range earning forecast, Jackson Hamilton, CFO of STT believes that STT is currently trading below its intrinsic value.
Since STT is supposed to issue new equity to finance a new project in near future, he feels that it needs to arrange an IR to publicize STT's intrinsic equity value. In order to determine if STT is indeed underpriced, Jackson has assembled the information presented below to estimate the current value of STT's stock using DCF model.
He believes that STT's FCFE will grow at 20 percent for three years after 2014, then stabilizes at 3 percent from 2018 onward. Jackson assumes that STT's capital expenditures, depreciation, and working capital will change in direct proportion to FCFE.
A required rate of return on equity is assumed to be 15 percent.
Estimate FCFEs from 2014 through 2018 and then calculate STT's per share intrinsic value as of the end of 2014 (Ignore the midyear adjustment)
MUse the formula introduced the lecture notes. FCFE=NI -NetCAPEX - NetOA +NetFNCE
Also refer to the free cash flow valuation in =FSAP_PepsiCo2012_No SCF.xls
Make sure to do your calculations using excel function to show all of your work!
| SunTrust Telecom Inc.,I/S |
2014 |
2013 |
| (millions) |
|
|
| Net Sales |
530 |
500 |
| Cost (Excluding depreciation) |
381.6 |
360 |
| Depreciation |
39.8 |
37.5 |
| Total operating costs |
421.4 |
397.5 |
| Earinings before interest and tax |
108.6 |
102.5 |
| Less interest |
(16.0) |
(13.9) |
| Earnings before taxes |
92.6 |
88.6 |
| Taxes (40%) |
(37.0) |
(35.4) |
| Net income before preferred dividends |
55.6 |
53.2 |
| Preferred dividends |
(7.4) |
(6.0) |
| Net income available for common dividends |
48.2 |
47.2 |
| common dividends |
29.7 |
40.8 |
| Additions to retained earnings |
18.5 |
6.4 |
|
|
|
| Number of shares |
10 |
10 |
| Dividends per share (in dollars) |
2.97 |
4.08
|
| SunTrust Telecom Inc.,I/S |
2014 |
2013 |
|
|
2014 |
2013 |
| (In millions of dollars) |
|
|
|
|
|
|
| Assets |
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
Accounts payable |
11.2 |
9.6 |
| Cash |
5.6 |
5.3 |
|
Notes payable |
74.1 |
69.5 |
| Marketable securities |
51.9 |
53 |
|
Accruals |
28.1 |
27.5 |
| Accounts receivable |
56.2 |
49.9 |
|
Total current liabilities |
113.4 |
106.6 |
| Inventories |
112.4 |
106 |
|
|
|
|
| Total current assets |
226.1 |
214.2 |
|
Long-term bonds |
148.2 |
140.8 |
|
|
|
|
Preferred stock |
37.1 |
35.4 |
|
|
|
|
Common stock (par plus paid-in-capital) |
160 |
160 |
| Net plant and equipment |
397.5 |
375 |
|
Retained earnings |
164.9 |
146.4 |
|
|
|
|
Common equity |
324.9 |
306.4 |
| Total assets |
623.6 |
589.2 |
|
Total liabilities and equity |
623.6 |
589.2 |
|
|
|
|
|
growth rate |
|
|
|
|
3% |
| Year |
2013 |
2014 |
|
|
End Year |
2014 |
2015 |
2016 |
2017 |
2018 |
| 1) Net Income attributable to common shares |
47.2 |
48.2 |
|
|
|
0 |
1 |
2 |
3 |
4 |
| Net Capial Assets |
|
|
|
|
FCFE/share |
|
|
|
|
|
| 2) Net CAPEX |
|
|
|
|
Continuing value@ the end of year 2007 |
|
|
|
|
|
| Net Operating Assets |
|
129.3 |
|
|
|
|
|
|
|
|
| 3) Net Operatimng Asset Investments |
|
|
|
|
PV factors @15% |
|
0.869565 |
0.756144 |
0.657516 |
|
| Net Financial Obligations |
187.4 |
|
|
|
|
|
|
|
|
|
| 4) NetFNCE |
|
|
|
|
PV of FCFEs |
|
|
|
|
|
| 5) Free Cash Flow for Common Equity 1)-2)-3)+4) |
|
|
|
PV of Continuing Value |
|
|
|
|
|
| 6) # of shares |
|
10 |
|
|
|
|
|
|
|
|
| 7)per share FCFE, 5) / 6) as of the end of 2014 |
|
|
|
|
Sum of PVs |
|
|
|
|
|
|
|
|
|
|
(per share equity value) |
|
|
|
|
|