Lockheed, one of the largest defense contractors in the United States, reported EBITDA of $1,290 million in a recent financial year, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital expenditures amounted to $450 million during the year, and working capital was 7% of revenues (which were $13,500 million). The firm had debt outstanding of $3.068 billion (in book value terms), trading at a market value of $3.2 billion, and yielding a pretax interest rate of 8%. There were 62 million shares outstanding, trading at $64 per share, and the most recent beta is 1.10. The tax rate for the firm is 40%. (The Treasury bond rate is 7%.) The firm expects revenues, earnings, capital expenditures, and depreciation to grow at 9.5% a year for the next five years, after which the growth rate is expected to drop to 4%. (Even though this is unrealistic, assume that capital spending will offset depreciation in the stable-growth period.) The company also plans to lower its debt/equity ratio to 50% for the steady state (which will result in the pretax interest rate dropping to 7.5%).
(a) Estimate the value of the entire firm.
(b) Estimate the value of the equity in the firm and the value per share. Are Lockheed shares selling close to their fundamental value?