You are trying to value LF, a data processing company. The company generated $1 billion in revenues in the most recent financial year and expects revenues to grow 3% per year in perpetuity. It generated $30 million in after-tax operating income in the most recent financial year and expects after-tax operating margin to increase 1% per year starting from the current year (Year 0) to year 3. After year 3, the margin will stabilize at year 3 levels forever. The firm is expected to have depreciation of $ 20 million and capital expenditures of $15 million each year for the next 3 years and to earn a 10% return on capital in perpetuity after that. There are no working capital requirements. The cost of capital will be 12% for the next 3 years and 10% thereafter.
(Hint, we are currently in Year 0 and the After Tax Operating Margin in Year 0 is 3%)
1. Estimate the value of the firm at the end of the third year (terminal value).
2. Estimate the Present Value of the Terminal Value.
3. Estimate the value of equity per share today, if the firm has $150 million in debt outstanding, $25 million as a cash balance and 10 million shares.