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    What is the value of one ordinary share of the company?

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    I am evaluating a company. It is considered to be 2002, and this time, the company & the whole industry is considered unprofitable. The company doesn't pay dividends on its common shares. I have decided to value the company using my forcasts of FCFE and assume:

    * The company has 17 billion outstanding shares
    * Sales will be $5.5 billion in 2003, increasing at 28 percent annually for the next four years (through 2007)
    * Net income will be 32 percent of sales
    * Investment in fixed assests will be 35 percent of sales, investment in working capital will be 6 percent of sales, and depreciation will be 9 percent of sales
    * 20 percent of the investment in assets will be financed with debt
    * Interest expense will be only 2 percent of sales.
    * The tax rate will be 10 percent.
    * The company beta is 2.1, the risk-free government bond rate is 6.4 percent, and the equity risk premium is 5.0 percent.
    * At the end of 2007, I proect the company will sell for 18 times earnings.

    What is the value of one ordinary share of the company?

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    Solution Preview

    Please refer to the attachment.

    I wonder if the sentence "Net income will be 32 percent of sales" is actually "GROSS income". Because net income means profit after ALL expenses and taxes. So, if this is the ratio of net income, then we can jump the steps in calculating the net income.

    The company's sales in 2007 is 5.5*(1+0.28)^4 = 14.764 billion
    GROSS income is: EBIT = 14.764*32%= 4.724
    Investment in fixed assets will be F =14.764*35% = ...

    Solution Summary

    The value of one ordinary shares of the company are given. The investments in assets to be financed with debt are analyzed.