Calculate stts per share intrinsic value as of the end

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Reference no: EM132001763

SunTrust Telecom, Inc.(STT) provides centralized telephone systems in remote areas of underdeveloped countries.

As a result of a recent world-wide economic downturn, the price of STT's stock price has declined dramatically to around $30.

Given the current economic outlook, however, and STT's long-range earning forecast, Jackson Hamilton, CFO of STT believes that STT is currently trading below its intrinsic value.

Since STT is supposed to issue new equity to finance a new project in near future, he feels that it needs to arrange an IR to publicize STT's intrinsic equity value. In order to determine if STT is indeed underpriced, Jackson has assembled the information presented below to estimate the current value of STT's stock using DCF model.

He believes that STT's FCFE will grow at 20 percent for three years after 2014, then stabilizes at 3 percent from 2018 onward. Jackson assumes that STT's capital expenditures, depreciation, and working capital will change in direct proportion to FCFE.

A required rate of return on equity is assumed to be 15 percent.

Estimate FCFEs from 2014 through 2018 and then calculate STT's per share intrinsic value as of the end of 2014 (Ignore the midyear adjustment)

MUse the formula introduced the lecture notes. FCFE=NI -NetCAPEX - NetOA +NetFNCE

Also refer to the free cash flow valuation in =FSAP_PepsiCo2012_No SCF.xls

Make sure to do your calculations using excel function to show all of your work!

SunTrust Telecom Inc.,I/S	2014	2013
(millions)
Net Sales	530	500
Cost (Excluding depreciation)	381.6	360
Depreciation	39.8	37.5
Total operating costs	421.4	397.5
Earinings before interest and tax	108.6	102.5
Less interest	(16.0)	(13.9)
Earnings before taxes	92.6	88.6
Taxes (40%)	(37.0)	(35.4)
Net income before preferred dividends	55.6	53.2
Preferred dividends	(7.4)	(6.0)
Net income available for common dividends	48.2	47.2
common dividends	29.7	40.8
Additions to retained earnings	18.5	6.4

Number of shares	10	10
Dividends per share (in dollars)	2.97	4.08

SunTrust Telecom Inc.,I/S	2014	2013		2014	2013
(In millions of dollars)
Assets			Liabilities and Equity
			Accounts payable	11.2	9.6
Cash	5.6	5.3	Notes payable	74.1	69.5
Marketable securities	51.9	53	Accruals	28.1	27.5
Accounts receivable	56.2	49.9	Total current liabilities	113.4	106.6
Inventories	112.4	106
Total current assets	226.1	214.2	Long-term bonds	148.2	140.8
			Preferred stock	37.1	35.4
			Common stock (par plus paid-in-capital)	160	160
Net plant and equipment	397.5	375	Retained earnings	164.9	146.4
			Common equity	324.9	306.4
Total assets	623.6	589.2	Total liabilities and equity	623.6	589.2

growth rate

20%

Year

2013

2014

End Year

2014

2015

2016

2017

2018

1) Net Income attributable to common shares

47.2

48.2

Net Capial Assets

FCFE/share

2) Net CAPEX

Continuing value@ the end of year 2007

Net Operating Assets

129.3

3) Net Operatimng Asset Investments

PV factors @15%

0.869565

0.756144

0.657516

Net Financial Obligations

187.4

4) NetFNCE

PV of FCFEs

5) Free Cash Flow for Common Equity 1)-2)-3)+4)

PV of Continuing Value

6) # of shares

7)per share FCFE, 5) / 6) as of the end of 2014

Sum of PVs

(per share equity value)

Reference no: EM132001763

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