Double B Industry Corporation has reached its maturity stage, and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that, as a mature venture, the appropriate equity discount rate for Double B is 18 percent. Double B Industry CORPORATION 2019 2020 Cash $50,000 $40,000 Accounts receivables 200,000 260,000 Inventories 450,000 500,000 Total current assets 700,000 800,000 Fixed assets, net 400,000 500,000 Total assets $1,100,000 $1,300,000 Accounts payable 130,000 $170,000 Accruals 50,000 70,000 Bank loan 90,000 90,000 Total current liabilities 270,000 330,000 Long-term debt 300,000 400,000 Common stock($10 par) 300,000 300,000 Capital surplus 50,000 50,000 Retained earnings 180,000 220,000 Total liabilities and equity $1,100,000 $1,300,000 2019 2020 Net sales $1,400,000 $1,600,000 Cost of goods sold 780,000 900,000 Gross profit 620,000 700,000 Marketing 130,000 150,000 General and administrative 150,000 150,000 Depreciation 40,000 53,000 EBIT 300,000 347,000 Interest 45,000 57,000 Earnings before taxes 255,000 290,000 Income Tax (40%) 102,000 116,000 Net income $153,000 $174,000 A. Estimate the free cash flows available to the equity investors for 2021. B. Estimate the value of Double B equity at the end of 2020 by applying the terminal value perpetuity equation. C. By applying the terminal value equation at the end of 2020, what are we assuming about the future? D. How would your valuation estimate change if the sales growth rate had been 6 percent but the discount rate had been 20 percent? Explain Make sure to show all the formulas and calculations in addition to any assumption needed.
Double B Industry Corporation has reached its maturity stage, and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that, as a mature venture, the appropriate equity discount rate for Double B is 18 percent.
Double B Industry CORPORATION
2019 2020
Cash $50,000 $40,000
Accounts receivables 200,000 260,000
Inventories 450,000 500,000
Total current assets 700,000 800,000
Fixed assets, net 400,000 500,000
Total assets $1,100,000 $1,300,000
Accounts payable 130,000 $170,000
Accruals 50,000 70,000
Bank loan 90,000 90,000
Total current liabilities 270,000 330,000
Long-term debt 300,000 400,000
Common stock($10 par) 300,000 300,000
Capital surplus 50,000 50,000
Total liabilities and equity $1,100,000 $1,300,000
2019 2020
Net sales $1,400,000 $1,600,000
Cost of goods sold 780,000 900,000
Gross profit 620,000 700,000
Marketing 130,000 150,000
General and administrative 150,000 150,000
EBIT 300,000 347,000
Interest 45,000 57,000
Earnings before taxes 255,000 290,000
Income Tax (40%) 102,000 116,000
Net income $153,000 $174,000
A. Estimate the
B. Estimate the value of Double B equity at the end of 2020 by applying the terminal value perpetuity equation.
C. By applying the terminal value equation at the end of 2020, what are we assuming about the future?
D. How would your valuation estimate change if the sales growth rate had been 6 percent but the discount rate had been 20 percent? Explain
Make sure to show all the formulas and calculations in addition to any assumption needed.
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