Problem
Elsa Manufacturing has projected sales of $138 million next year. Costs are expected to be $77 million, and net investment is expected to be $11 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are 6.2 million shares of stock outstanding, and investors require a return of 12 percent on the company's stock. The corporate tax rate is 21 percent.
• What is your estimate of the current stock price?
• Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 12. What is your new estimate of the company's stock price?