Consumer Products Inc. (CPI) is a U.S. regional consumer products company located in Phoenix, Arizona. The company manufactures and distributes a small line of consumer products to retailers in major western cities including Los Angeles, San Francisco, Seattle, Portland, and Phoenix. The company has an excellent reputation as a good corporate citizen and producer of some of the highest quality products in the business.
CPI's three major brands are Shades of Youth, a hair care line that recently has been doing extremely well as the aging baby boomers look for products to help retain some of their youth; Super Clean, a line of detergent and bleach products; and Super White, a line of tooth paste that quickly and safely whitens teeth. Super Clean is the anchor division, and it was the sole line of products the company had when Javier Lopez founded it in 1951. The company launched Shades of Youth in 1975 and Super White in 1980.
You have headed up the Super Clean division for the last 8 years and were recently promoted to Chairperson of the Board and Chief Executive Officer (CEO). The firm went public ten years ago under the leadership of your predecessor as CEO, Regina Baker. CPI is well established on Wall Street and has a reputation of being a good company that is conservative and a safe investment.
With only a U.S. regional presence and $200 million in revenue, you are clearly aware that the company's ability to compete with the industry giants (Procter & Gamble, Unilever, Colgate, and Gillette) is limited. You believe that the firm must expand to other regions in the U.S. and begin international expansion if it is going to grow and prosper over the next decade.
The Board has reservations about making such bold moves, arguing that the company has been a successful regional company for over 50 years and can remain a niche player in the consumer products business. You see things differently. You see that the market is changing and competitors are becoming more aggressive by making acquisitions or developing new products that are extremely competitive with CPI's brands. More importantly, you believe that the company will either be crushed by competition or forced into a merger to survive.
Value the company using the free cash flow to equity (FCFE) model and the constant growth dividend discount model (DDM). You will use the link below for the company's financials.
Use the dividend compound annual growth rate (CAGR) for the last 5 years as the constant dividend growth rate and assume the required rate of return on stocks is 10 percent.
Compare these two valuations with the year-end stock price listed on CPI's balance sheet. Discuss why the values differ and which you believe to be the firm's true value.
Finally, comment on the outlook of the firm, discussing what you think will happen to the firm's valuation with the expansion.
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The response addresses the queries posted in 904 words with references.
// You are required to value the company by using free cash flow equity model and constant growth dividend discount model. Take facts & figures from the attachment and provide some description on the terms given in the attached text. I am going to provide you an understanding on these points and discuss the required question. //
As we all know that the company is in the need to expand the business immediately because of the fast and increasing demand of the products of the company by the market. The required rate of return of the company is 10%. We are now starting with the Free Cash Flow to Equity (FCFE) to determine the future price and dividend of the company. FCFE is a measure of what a firm can afford to pay out as a dividend.
Free cash Flow to Equity can be calculated as: Net Income - (Capital Expenditure - Depreciation) - (Change in non cash Working capital) + (New debt issued - Debt payment).
The amount that comes is the cash flow available to be paid out as dividend or stock buy backs of the company. The FCFE dividend discount model is to value the equity using the constant growth rate and required rate of return.
Net income for the year 2003 is $41.58million, capital expenditure stood at (9), while a depreciation charge for the year is 9. Putting the following figures into the formula, we get the figure of 41.58 as the Free Cash Flow to Equity. This FCFE is the amount ...
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