1) Select a profitable company for your group. Calculate its Free Cash Flow using the latest year’s financial statements available in yahoo finance.
2) Project its Free Cash Flow for the next five years:
a) Assume a suitable growth rate for the company; use this rate for projecting its EBIT; growth rates can be different for different years. Please write a coherent and small paragraph and justify the choice of your growth rates clearly.
b) Use the average tax rate over the past three years (floor 20% and cap 40%).
c) Use the growth rate in (a) to project its depreciation, capital expenditure, and NWC for the next five years.
3) Following the next five years, assume your FCF will grow at a rate given in this webpage: http://www.bls.gov/opub/mlr/2013/article/industry-employment-and-output-projections-to-2022.htm
use the last column from any of the tables. If the growth rate is given as negative, assume 0.
4) Calculate WACC:
a) Find the company’s Debt/Equity ratio (consider market cap for this calculation).
b) Find the this year’s interest expense / [(last year’s total debt + this year’s total debt)/2]: assume this number to be the cost of debt. Here debt = long term + short term debt.
c) Calculate the average of the monthly returns of its stocks using the adjusted price for the last 12 months’ data: this is your cost of equity.
d) Tax rate is already calculated in 2(b)
5) Using the Free Cash Flows and the WACC, find the valuation of your company. ValueOP => discounted future free cash flows.
6) Find the stock price of the company. Stock price = (ValueOP – Debt + Cash And Cash Equivalents + Short Term Investments)/ number of shares outstanding; (number of shares outstanding = Market Cap/Share Price);
7) Now consider two competitors of your company. Find their Forward P/E ratios (yahoo finance); take the average. You know your company’s Net Income for this year. Using this average P/E ratio, find the market cap of your company and then its share price.
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