Byron Productions has sales in the most recent year of $650M, and EBIT margin of 38%. The firm also had capital expenditures of $120M and depreciation expense of $90M. Working capital needs are 9% of sales. The firm expects sales, capex, and depreciation to grow by 18% in Year 1, 13% in Year 2 and 8% in year 3. Beginning in Year 4, the growth rate will drop to 3.5%, and the return on new invested capital will be 8.5% for the foreseeable future. The firm is financed with 60/40 capital structure, the bondholders require a 6.5% return, and the stockholders require an 11% return. The relevant tax rate is 34%. The firm has $50M in excess cash, investments in other company’s worth $125m and unfunded pension obligations of $85M.
Estimate the Enterprise and Equity Value using DCF analysis. Use the key value driver formula for the calculation of continuing value (terminal value). If the stock is currently trading in the market at $15 per share, do you think it is undervalue, overvalued or fairly valued based on your DCF model of intrinsic value. Assume 150M shares outstanding. Given your estimates, will Byron Productions increase its value over time?