Suppose today is January 1, 2022. You wish to value the shares of Terrapin Industries, a private firm with 100 million outstanding shares, $300M in debt, and $25M in excess cash. The company has a tax rate of 30%.
You expect the company’s Sales to equal $300 million in 2022, and to grow at 10% per year through 2025. The company’s EBIT margin (i.e., EBIT as a % of sales) is expected to be 10%, while Net Working Capital is expected to equal 20% of (same year) sales. The balance sheet amount of Net Working Capital at the end of 2021 was $55 million. You expect that the company’s Net PP&E will remain constant from now through 2025 (i.e., capital expenditures will equal depreciation each year). After 2025, free cash flows are projected to grow at a constant 2% rate forever.
You expect Terrapin to maintain a 50% D/V ratio in the future. Given this, you have estimated the beta of Terrapin’s equity (Be) at 1.1 and the beta of its debt (Bd) at 0.3. The current long-term risk-free rate is 3%, while the expected market risk premium is 4%.
a. What is your estimate of Terrapin’s (after-tax) Weighted Average Cost of Capital?
b. Using the DCF method, estimate the value per share of Terrapin stock as of today given the WACC you calculated above.