Cell Phone Inc. is a private cellular firm that reported net income of $5 million in the current financial year. The firm has borrowed $10 million at a rate of 15%, on which it reported interest expenses of $1.5 million in the current financial year. Cell Phone’s debt has an estimated current market value of $8.5 million. The firm has depreciation of $0.1 million for the current year, and capital expenditures equal to 200% of depreciation. The firm’s sales and capital expenditures are expected to grow at 5% annually during the next five years, while depreciation and interest expenses will remain constant. The firm has estimated that COGS (excluding depreciation) over Sales is 35% and that SG&A/Sales is 15%. The following information was also obtained from peer publicly traded firms:
Firm Asset Beta P/E M/B (Equity)
A 0.65 8.2 1.6
B 0.70 9.5 1.3
C 0.55 7.3 0.9
D 0.63 10.5 1.2
E 0.58 15.2 1.4
The firm’s book value of equity is $7.5 million and the firm’s owners hold 750,000 shares. The yield on 10 year Treasuries is 6.5% and the historic market risk premium is assumed to be 5.5%. Assuming that there is no working capital requirement and a constant growth rate of FCFF of 4% beyond the forecast period of five years, estimate a range for the firm’s intrinsic value per share at the end of the current year (tax rate = 50%).