Quinton Johnston is evaluating Taiwan Semiconductor Manufacturing Co., Ltd., (NYSE:
TSM) headquartered in Hsinchu, Taiwan. In 2001, when Johnston is performing his analysis, the company—and indeed, the whole industry—is unprofitable. Furthermore, TSM pays no dividends on its common shares. Johnston decides to value TSM using his forecasts of FCFE and makes the following assumptions:
• The company has 17.0 billion outstanding shares.
• Sales will be $5.5 billion in 2002, increasing at 28 percent annually for the next four years (through 2006).
• Net income will be 32 percent of sales.
• Investment in fixed assets will be 35 percent of sales, investment in working capital will be 6 percent of sales, and depreciation will be 9 percent of sales.
• 20 percent of the investment in assets will be financed with debt.
• Interest expenses will be only 2 percent of sales.
• The tax rate will be 10 percent.
• TSM’s beta is 2.1, the risk-free government bond rate is 6.4 percent, and the equity risk premium is 5.0 percent.
• At the end of 2006, Johnston projects TSM will sell for 18 times earnings.
What is the value of one ordinary share of Taiwan Semiconductor Manufacturing Co., Ltd.?