Question #73198

Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are

5.5 million shares of stock outstanding and investors require a return of 13 percent return on the companyâ€™s stock. The corporate tax rate is 40 percent.

a. What is your estimate of the current stock price?

b. Suppose instead that you estimate the terminal value of the company using a PE

multiple. The industry PE multiple is 11. What is your new estimate of the companyâ€™s

stock price?

5.5 million shares of stock outstanding and investors require a return of 13 percent return on the companyâ€™s stock. The corporate tax rate is 40 percent.

a. What is your estimate of the current stock price?

b. Suppose instead that you estimate the terminal value of the company using a PE

multiple. The industry PE multiple is 11. What is your new estimate of the companyâ€™s

stock price?

Expert's answer

Sales = $145 million, Costs = $81 million, net investment = $15 million, g = 14% (declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely), 5.5 million shares of stock outstanding, r = 13%, t = 40%.

a. What is your estimate of the current stock price?

P = D0*(1 + g)/(r - g) = (145 - 81 - 15)/5.5*(1 + 0.14 - 0.02)/(0.13 - 0.12) = $997.8.

b. P = PE*EPS = 11*(145 - 81 - 15)/5.5 = $98.

a. What is your estimate of the current stock price?

P = D0*(1 + g)/(r - g) = (145 - 81 - 15)/5.5*(1 + 0.14 - 0.02)/(0.13 - 0.12) = $997.8.

b. P = PE*EPS = 11*(145 - 81 - 15)/5.5 = $98.

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