18 Kingsman Incorporated had operating income before interest and taxes in 2011 of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $10 million that same year. Capital spending totaled $20 million during 2011. At the end of 2010 and 2011, working capital totaled $70 and $80 million, respectively. The firm's combined marginal state, local, and federal tax rate was 40% and its debt outstanding had a market value of $1.2 billion. The 10-year Treasury bond rate is 5% and the borrowing rate for companies exhibiting levels of creditworthiness similar to Kingsman is 7%. The historical risk premium for stocks over the risk free rate of return is 5.5%. No Growth's beta was estimated to be 1.0. The firm had 2,500,000 common shares outstanding at the end of 2011. Kingsman target debt to total capital ratio is 30%.
a. Estimate free cash flow to the firm in 2011.
b. Estimate the firm's cost of capital.
c. Estimate the value of the firm assuming the comparative market multiple of EBITDA is 6x
d. Estimate the value of the equity of the firm at the end of 2011.
e. Estimate the value per share at the end of 2011.
FINANCIAL MODELING EXERCISE
Prepare a financial five year income statement projection in Excel with the following assumptions:
Year One:
Unit Sales - 4,000,000
Unit Price - $25
COGS - 50%
Sales & Marketing Expense - 15% of revenues
General & Administrative Expense - $2,000,000
Tax Rate 40%
Annual Depreciation - $100,000 (included in G&A Expense)
Year Two through Year Five
Unit Sales Increase - 10% per year
Price Increases - 2% per year
G&A increases - 4% per year
1. Calculate Annual
a. Gross Margin
b. EBITDA Margin
c. Net Profit Margin
2. If Company is valued at 6x EBITDA, what is the estimated current value after Year 1? Year 5?
3. Describe the operating leverage this company possesses?