Reference no: EM133059871

Ecolab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of $2.35 in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998, and 6% a year after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993. Both are expected to grow at the same rate as earnings from 1994 to 1998. Working capital is expected to remain at 5% of revenues, and revenues which were $1,000 million in 1993 are expected to increase 6% a year from 1994 to 1998, and 4% a year after that. The firm currently has a debt ratio of 5%, but plans to finance future investment needs (including working capital investments) using a debt ratio of 20%. The stock is expected to have a beta of 1.00 for the period of the analysis, the treasury bond rate is 6.50%, and the equity risk premium is 5.5%. There are 63 million shares outstanding. The firm's corporate bonds were rated AA. [A typical large AA rated company had an interest coverage ratio of 6.75 and a default spread of 1.15%.]

(a). What is the firm current cost of equity?

(b). Estimate the Free Cash Flow to Equity of Ecolab Inc. in each year from 1994 to 1998 (do not discount)

(c). Estimate the Terminal Value per share of Ecolab Inc. in the year 1998?

(d). Estimate the intrinsic price of Ecolab Inc. as of 1993?