Boilermaker Commercial Ovens Case Study

Register to read the introduction… Boilermaker Commercial Ovens, Inc., has just announced that is has gone into contract with McMiller’s Restaurants to install ovens in all of the McMiller’s new locations. The project will go on for 8 years, and free cash flows will be reduced by $1,000,000 for each of the first two years of the contract, which starts today, and free cash flows will be increased by $3,000,000 for each of the final six years of the agreement. Boilermaker has a weighted average cost of capital of 9%. There are currently 3,700,000 shares of Boilermaker outstanding, and the current price is $46.73 per share. What effect should this announcement have on the price of a share of …show more content…
On one particular day, McDonald’s has a stock price of $86.71 and an EPS of $5.31. Its competitor, YUM Brands, has an EPS of $3.40. What would be the expected price of YUM Brands stock on that day if the price is estimated using the P/E method of …show more content…
Year 0 1 2 3 Sales $511,500 $552,420 $585,565 Growth (from prior yr) 10% 8% 6% EBIT (20% sales) 102,300 110,484 117,113 Less: tax (30%) 30,690 33,145 35,134 FCF 71,610 77,339 81,979

Constant growth starts at beginning of year 3 V(end of yr 2) = 81979/(.11-.06) = $1,639,583
To calculate V0, take the PV of all FCF’s CF1 71,610 CF2 (77,339 + 1,639,583) NPV I =11% V0 = $1,458,005

P0 = 1,458,005 + 90,000 – 60,000 = $74.40 20,000 shr

2. V0 = Mkt value equity + debt – cash = 59.8 x 750,000 + 1,400,000 – 1,000,000 = 44,850,000 + 1,400,000 – 1,000,000 = $45,250,000 = FCF1/(WACC – g) 45,250,000 = 2,300,000/(.13 – g) Solve for g g = 7.92% so the 7% growth rate is too low.

3. Solve for the NPV of the FCF’s CF0 = 0 CF1 = -1,000,000 F1 = 2 CF2 = 3,000,000 F2 = 6 NPV I = 9% NPV = $9,568,013

There are 3,700,000 shares so the additional per share value is 9,568,013/3,700,000 = $2.59

P0 = 46.73 + 2.59 = $49.32

4. Horizon value in year 4 = FCF in year 5/(WACC – g) = 18.65(1+.05)/(.12-.05) = = 279.75 CF0 0 CF1