On one particular day, McDonald’s has a stock price of $86.71 and an EPS of $5.31. Its competitor, YUM Brands, has an EPS of $3.40. What would be the expected price of YUM Brands stock on that day if the price is estimated using the P/E method of …show more content…
Year 0 1 2 3 Sales $511,500 $552,420 $585,565 Growth (from prior yr) 10% 8% 6% EBIT (20% sales) 102,300 110,484 117,113 Less: tax (30%) 30,690 33,145 35,134 FCF 71,610 77,339 81,979
Constant growth starts at beginning of year 3 V(end of yr 2) = 81979/(.11-.06) = $1,639,583
To calculate V0, take the PV of all FCF’s CF1 71,610 CF2 (77,339 + 1,639,583) NPV I =11% V0 = $1,458,005
P0 = 1,458,005 + 90,000 – 60,000 = $74.40 20,000 shr
2. V0 = Mkt value equity + debt – cash = 59.8 x 750,000 + 1,400,000 – 1,000,000 = 44,850,000 + 1,400,000 – 1,000,000 = $45,250,000 = FCF1/(WACC – g) 45,250,000 = 2,300,000/(.13 – g) Solve for g g = 7.92% so the 7% growth rate is too low.
3. Solve for the NPV of the FCF’s CF0 = 0 CF1 = -1,000,000 F1 = 2 CF2 = 3,000,000 F2 = 6 NPV I = 9% NPV = $9,568,013
There are 3,700,000 shares so the additional per share value is 9,568,013/3,700,000 = $2.59
P0 = 46.73 + 2.59 = $49.32
4. Horizon value in year 4 = FCF in year 5/(WACC – g) = 18.65(1+.05)/(.12-.05) = = 279.75 CF0 0 CF1