Troy is preparing a valuation of Logistic Solutions using a multiple-stage FCFE valuation

jagguarpaw January 10, 2017 0 Comments

Question: Troy is preparing a valuation of Logistic Solution…

Troy is preparing a valuation of Logistic Solutions using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $2.00. The FCFE is expected to grow at 15 percent for the next three years, then at 11 percent annually for the following five years, and finally at a constant growth rate of 6 percent starting the ninth year. Logistic Solutions’ estimated beta is 1.12, and Troy believes that the current market conditions dictate a 2.15% risk free rate and an 11% expected market return.

The following are five independent questions.

a) Given Troy’s assumptions and approach, estimate the value of a share of Logistic Solutions.

b) If the terminal growth rate is projected to be 7%, rather than 6%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

c) If the expected market return is assumed to be 9%, rather than 11%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

d) If the systematic risk coefficient (beta) of the stock increases from 1.12 to 1.48, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense.

e) If Logistic Solutions’ estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Logistic Solutions. Assume Logistic Solutions’ bonds outstanding are traded at a yield of 6.5% and the risk premium required for Logistic Solutions’ equity shareholders over bond holders is 5%.