(9 marks, difficulty level: Medium/Hard) Eagles Industries has 80 million outstanding shares, $138 million in debt, $106 million in cash, and the reported projected free cash flow for the next four years.

Year

0

1

2

3

4

Earnings and FCF Forecast ($ million)

1

Sales

546

595.1

660.6

708.2

743.6

2

Growth vs prior year

9.0%

11.0%

7.2%

5.0%

3

Cost of Goods Sold

-$413.6

-$445.7

-$466.5

-$484.8

4

Gross Profit

$181.54

$214.91

$241.67

$258.78

5

Selling, General, and Administrative

-$93.6

-$103.2

-$109.4

-$114.9

6

Capital Cost Allowance (CCA)

-$7.0

-$7.5

-$9.0

-$9.5

7

EBIT

80.9

104.2

123.3

134.4

8

Less: Income Tax (40% EBIT)

-$32.4

-$41.7

-$49.3

-$53.8

9

Plus: Capital Cost Allowance (CCA)

$7.0

$7.5

$9.0

$9.5

10

Less: Capital Expenditures

-$7.7

-$10.0

-$9.9

-$10.4

11

Less: Inc. in NWC

-$6.3

-$8.6

-$5.6

-$4.9

12

Free Cash Flow

$41.6

$51.4

$67.5

$74.8

Terminal Value

Total Cash Flow

Suppose Eagles's revenue and free cash flow are expected to grow at a 5.2% rate beyond year 4. If Eagles's weighted average cost of capital is 13.0%, what is the value of Eagles's stock based on this information?

Question

(9 marks, difficulty level: Medium/Hard) Eagles Industries has 80 million outstanding​ shares, $138 million in​ debt, $106 million in​ cash, and the reported projected free cash flow for the next four years.

Year

0

1

2

3

4

Earnings and FCF Forecast ($ million)

1

Sales

546

595.1

660.6

708.2

743.6

2

Growth vs prior year

9.0%

11.0%

7.2%

5.0%

3

Cost of Goods Sold

-$413.6

-$445.7

-$466.5

-$484.8

4

Gross Profit

$181.54

$214.91

$241.67

$258.78

5

Selling, General, and Administrative

-$93.6

-$103.2

-$109.4

-$114.9

6

Capital Cost Allowance (CCA)

-$7.0

-$7.5

-$9.0

-$9.5

7

EBIT

80.9

104.2

123.3

134.4

8

Less: Income Tax (40% EBIT)

-$32.4

-$41.7

-$49.3

-$53.8

9

Plus: Capital Cost Allowance (CCA)

$7.0

$7.5

$9.0

$9.5

10

Less: Capital Expenditures

-$7.7

-$10.0

-$9.9

-$10.4

11

Less: Inc. in NWC

-$6.3

-$8.6

-$5.6

-$4.9

12

Free Cash Flow

$41.6

$51.4

$67.5

$74.8

Terminal Value

Total Cash Flow

Suppose​ Eagles's revenue and free cash flow are expected to grow at a 5.2% rate beyond year 4. If​ Eagles's weighted average cost of capital is 13.0%​, what is the value of​ Eagles's stock based on this ​information?

BlackTom AI · Accepted Answer

We start by restating the scenario and the options to ensure clarity about what we’re evaluating.
Question restatement: Eagles Industries has 80 million shares outstanding, $138 million in debt, $106 million in cash. The Free Cash Flow (FCF) forecast for years 1–4 is given, and FCF grows at 5.2% forever after year 4. The weighted average cost of capital (WACC) is 13%. We’re asked for the value of Eagles' stock based on this information, choosing from the given options.
Answer choices: $14.39, $9.46, $11.15, $16.48, $12.59

Now we analyze each option step by step, addressing why each might be plausible or flawed and showing the underlying valuation logic.
Option 1: $14.39
- This would imply a higher equity value than our calculated baseline. To reach $14.39 per share, the total equity value would be 14.39 × 80 ≈ $1,151.2 million. Given debt of $138M and cash of $106M, the implied enterprise value would need to be around debt minus cash added to equity, i.e., EV ≈ Equity + Debt − Cash ≈ 1,151.2 + 138 − 106 ≈ $1,183.2 million. This is substantially higher than typical DCF results unless the terminal value or year 1–4 FCFs are much larger than shown. Since the provided FCFs are finite and the long-run growth rate is 5.2% with WACC 13%, achieving such a high EV would require much larger near-term FCFs or a much larger terminal value than those given. Therefore, this option seems at odds with the stated forecast unless an error is present.
Option 2: $9.46
- This matches a plausible result from a standard discounted cash flow (DCF) process: sum the present value of FCFs for years 1–4, add the present value of the terminal value, then subtract net debt to get equity value, and finally divide by shares outstanding. The typical calculation uses: FCF1 = 41.6, FCF2 = 51.4, FCF3 = 67.5, FCF4 = 74.8 (in $ millions). The terminal value is FCF5/(WACC − g) with FCF5 = FCF4 × (1 + g) and g = 5.2%. Discounting all cash flows at 13% and adjusting for debt and cash yields a per-share value near this figure. Minor rounding differences can produce a cent or two variation, but 9.46 is in line with a clean, correct application of the standard formula.
Option 3: $11.15
- This would imply a higher equity value than $9.46, so the calculated total EV would be larger. To reach $11.15 per share, the terminal value or near-term FCFs would need to be larger, or the discount rate would have to be lower. Given WACC is 13% and the forecasted FCFs are explicitly provided, achieving an $11.15 price would require assumptions not present in the data (e.g., significantly higher FCFs or a much higher perpetual growth). While not impossible, it deviates from the data as stated.
Option 4: $16.48
- This is even higher than Option 3 and would demand a substantially larger enterprise value. With 80 million shares, $16.48 implies equity value around $1,318.4 million, and after netting debt and cash, a much larger EV would be required. The given FCFs and growth assumption (g = 5.2%, WACC = 13%) would have to produce a far larger present value than the straightforward calculation. This makes this option unlikely unless one suspects a miscalculation or a misinterpretation of the input numbers.
Option 5: $12.59
- This option lies between the $9.46 and higher-priced alternatives. A value of $12.59 would require an EV that, after subtracting debt and adding cash, yields equity at that level. It could occur with slightly different rounding in present-value calculations, or a marginally different terminal-value estimate. However, given the concrete FCFs and the 5.2% perpetual growth at 13% discount, the base-case result tends to be closer to $9.46, with small deviations possible from rounding.

Synthesis of the valuation logic (without stating the final answer):
- The stock value is derived by valuing the entire operating business via a discounted cash flow: sum of present values of FCFs for years 1–4 plus the present value of the terminal value (TV) at year 4, where TV = FCF5 / (WACC − g) and FCF5 = FCF4 × (1 + g).
- After obtaining the enterprise value (EV) from the DCF, convert to equity value by subtracting net debt (debt minus cash). Finally, divide by the number of shares to get the per-share value.
- The exact numbers depend on precise arithmetic, including each year’s FCF, the perpetual growth rate, and compounding. Small rounding differences can yield slightly different per-share results, which explains minor variations among the provided options.

Note on why some options are less likely: options that require a much larger EV than the forecasted FCFs support are usually outcomes of either an unrealistically high terminal value (driven by a large FCF5 or a very high perpetual growth) or a much lower discount rate than stated. Conversely, an option like $9.46 aligns well with a direct, orderly application of the DCF framework using the given numbers and standard rounding rules.

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