At this point Quadrillion Realities Inc. (specialized tech consulting firm) estimates that unit sales likely will come in at 361,482, 372,663, 384,221, 357443, and 339,663 units respectively for the next five years as long as the firm keeps the average selling price per unit at $226.40 for the next three years and $232.67 in the following two years. Thereafter, growth in unit sales are expected to be 4.85% indefinitely. Due to the nature of the sub-sector of the high-tech industry the firm resides in, the company concentrates its efforts on producing a single product to keep focus.
After the results of an internal audit by senior Treasury staff, it has been determined that the company can produce at a variable cost per unit of $121.45 growing at 4.42% per year for the first 5 years and 4.86% per year indefinitely thereafter while overall fixed costs are estimated to be $13,682,335 annually for the first year and grow 3.48% per year indefinitely.
The necessary capital expenditures are projected to be $25,928,750 upfront and due to the nature of the investments that the company makes, it is deemed by the IRS to be depreciated on the five-year MACRS schedule. In the terminal phase of growth, investment strategy is expected to change in support of newer AI/AR opportunities. As such, average depreciation charge per year of $2,487,500 is expected and will follow a straight-line depreciation method with an on-going 3-year time horizon strategy. Working capital to support sales is estimated to be 13.17% of yearly sales for the first 5 years and then is projected to slow to a 4.93% annual growth rate thereafter.
The marginal corporate income tax rate is expected to average 33.43% barring any changes to the corporate tax code and the projected annual growth rate of Free Cash Flow (FCF) in the terminal phase is expected to be approximately 3.29% indefinitely. Historically, the debt-equity ratio has consistently been 1.15 for which Mercito’s current debt level is $34,475,000 with an average maturity of 5 years and an interest rate on this debt averaging 9.25%. The equity beta is deemed to be 2.117 while the risk-free rate of return is given as 2.54% and the market risk premium is 9.15%. Currently there are 6,997,640 shares of common stock outstanding.
You have been hired by Mercito Inc. to determine the following:
1) Operating Cash Flow for each of the first 5 years and the Terminal Phase
2) Free Cash Flow for each of the first 5 years and the Terminal Phase
3) The Asset Beta (Industry Beta) that Mercito can use in its analysis
4) The appropriate discount rate for Mercito in valuing the firm and hence stock price
5) The asset value of the firm
6) The equity value of the firm
7) The appropriate stock price Mercito 8) Make recommendations to improve Mercito’s stock price.