(9 marks, difficulty level: Medium/Hard) Eagles Industries has 70 million outstanding shares, $148 million in debt, $96 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 4.2% rate beyond year 4. If Eagles's weighted average cost of capital is 11.0%, what is the value of Eagles's stock based on this information?

Question

(9 marks, difficulty level: Medium/Hard) Eagles Industries has 70 million outstanding​ shares, $148 million in​ debt, $96 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 4.2% rate beyond year 4. If​ Eagles's weighted average cost of capital is 11.0%​, what is the value of​ Eagles's stock based on this ​information?

BlackTom AI · Accepted Answer

Question restatement and options:
- Eagles Industries has 70 million shares outstanding, $148 million in debt, $96 million in cash. The table provides forecasted free cash flows (FCF) for years 1–4:
  - FCF1 = $41.6 million
  - FCF2 = $51.4 million
  - FCF3 = $67.5 million
  - FCF4 = $74.8 million
- Growth rate beyond year 4 (g) = 4.2%; WACC (r) = 11.0%
- Need to value the stock price based on these inputs. Steps typically involve valuing the operating free cash flows via a discounted cash flow model, adding the terminal value at year 4, discounting back to present, then adjusting for debt and cash to get equity value, and finally dividing by shares outstanding.

Option-by-option analysis:
Option A: $11.15
- Why this might seem plausible: it’s a figure in the same ballpark as the other numbers, and a small misstep in the terminal value or discounting could push the result downward.
- Why it’s incorrect: computing the present value correctly requires (i) accurate FCFs for years 1–4, (ii) a correct terminal value using FCF4×(1+g) divided by (r−g), and (iii) the proper adjustment for debt and cash. A misquote in any of these components typically yields a value noticeably different from the precise calculation. In short, not matching the full DCF result indicates an arithmetic or assumption error in either the terminal value, the discounting, or the equity adjustment.

Option B: $16.48
- Why this might seem attractive: it reflects a higher equity value per share, perhaps due to overestimating future cash flows or misapplying the perpetuity formula.
- Why it’s incorrect: the terminal value at year 4 uses FCF4×(1+g) and a denominator of (r−g) = 0.11−0.042 = 0.068. Using FCF4 = 74.8 gives FCF5 ≈ 77.94, TV4 ≈ 1,145.0. Discounting TV4 back 4 years at 11% yields a substantial present value, but when you add the PVs of FCF1–4 and then adjust for debt and cash, the resulting equity value per share is lower than this option. Therefore, 16.48 overstated the value given the provided inputs.

Option C: $9.46
- Why this might seem plausible: a deeper discounting or very aggressive debt/cash adjustment can push value downward, giving sub-$10 per share results.
- Why it’s incorrect: the model with given FCFs, g, and r produces a higher equity value than 9.46 when you correctly compute the PV of FCFs (years 1–4) and the terminal value, then adjust for net debt. This option underestimates the value, suggesting an error in calculating the terminal value, misdiscounting, or omitting the year-4 cash flows properly.

Option D: $14.39
- Why this might seem plausible: slightly higher than the correct dock, perhaps due to showing a larger PV of terminal value or misallocating cash/debt adjustments.
- Why it’s incorrect: while closer to a plausible number, the precise valuation with the given numbers yields an equity value near $12.59 per share (based on FCFs of 41.6, 51.4, 67.5, 74.8 across years 1–4, growth 4.2%, WACC 11%). A miscalculation of the terminal value or a small arithmetic error could push the result toward 14.39, but it does not align with the correct DCF computation and the final per-share figure derived from debt/cash adjustments.

Option E: $12.59
- Why this is the correct interpretation: following the standard DCF approach with the provided data, you calculate the present value of FCFs for years 1–4, compute the terminal value at year 4 using FCF4×(1+g) divided by (r−g) where g = 0.042 and r = 0.11, discount these back to present value at 11%, sum them to get enterprise value, then adjust for net debt (debt minus cash) to obtain equity value, and finally divide by 70 million shares.
  - Step outline: PV of FCFs years 1–4 plus PV of TV4 gives enterprise value. TV4 = FCF5 / (r − g) with FCF5 = 74.8 × 1.042 ≈ 77.94, so TV4 ≈ 77.94 / 0.068 ≈ 1,145.03. Discounting back 4 years at 11% gives PV(TV4) ≈ 1,145.03 / 1.11^4 ≈ 755.2. PV of FCFs: PV1 ≈ 41.6/1.11 ≈ 37.5, PV2 ≈ 51.4/1.11^2 ≈ 41.8, PV3 ≈ 67.5/1.11^3 ≈ 49.3, PV4 ≈ 74.8/1.11^4 ≈ 49.3. Sum of PVs of FCFs ≈ 177.9. Enterprise value ≈ 177.9 + 755.2 ≈ 933.1. Equity value = EV + cash − debt ≈ 933.1 + 96 − 148 ≈ 881.1. Per-share value = 881.1 / 70 ≈ 12.59. This aligns with the option 12.59, which is consistent with the standard valuation steps described above.

Summary: After evaluating each option against the detailed DCF calculation using the given cash flows, growth, discount rate, and balance sheet figures, the per-share value that comes from the correct computation is approximately $12.59. This corresponds to Option E. The other options diverge due to arithmetic mistakes in terminal value, discounting, or debt/cash adjustments, or due to misapplication of the perpetuity formula.

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