Eskimo Pie
Eskimo Pie
1. What is your estimate of the value of Eskimo Pie Corporation as a stand alone company?
First we are going to consider the projected growth rate of Eskimo Pie Corporation using the sustainable growth model.
Sustainable Growth Model (SGM) = ROE * (1-PR) ROE = Return on Equity PR = Payout Ratio
ROE = Net Income/ Stockholders Equity = 2526 / 19496 = 12.95%
PR = Dividends per Share / Earnings per Share = .40 / .76 = 52.6%
SGM = 12.95% * (1-52.6%) = 12.95% * (.474) = 6.14%
Calculating WACC:
First step in calculating WACC is to use the Capital Asset Pricing Model (CAPM)
CAPM = Rf + Beta (MRP) Rf = Risk Free Rate Beta = Market figure as to how stock reacts to market fluctuations MRP = Market return rate – risk free rate
Rf = 7.92% (Figured using 30-year Treasury Bond Yeild) Beta = 1.23 (Calculated using the average of all copetitors) MRP = 7.5% (Prime Rate in Exhibit 9)
CAPM = 7.92% + 1.23(7.5%) = 7.92% + 9.23% = 17.15%
WACC = Kd (1-t) * D/(D/E) + Ke * E/(D+E) Kd = Cost of Debt T = Tax Rate D = Debt E = Equity Ke = Cost of Equity Kd = Interest/Long Term Debt = 67/744 = 9.01% T = 40% D = 744 E = 19496 Ke = 17.15%
WACC = .0901(1-.4)*(744/(744+19496)n+ .1715*(19496/(19496+744) = .0541*(744/20240) + .1715(19496/20240) = .0020 + .1652 = 16.7%
Free Cash Flows of Eskimo Pie:
Net Sales = 47,198
COGS = 31,780
Net Income = 2526
Depreciation = 1352
Capital Expenditures = 1311
Net Working Capital = 905
FCF = 2526+1352-1311-905 = 1662
Terminal Value for Eskimo Pie 1990:
Value = (FCF *(1+g))/(WACC-g)
FCF = 1662
G = 6.14%
WACC = 16.7%
Enterprise Value = 1662*1.0614/(.167-.0614) = 1764.05/ .1056 = 16,705
+ Cash = 13,191
- Long-term Debt = 744
Equity Value = 29,152
Number of Shares = 3,316
Equity value per share = 9.05
1. What is your estimate of the value of Eskimo Pie Corporation as a stand alone company?
First we are going to consider the projected growth rate of Eskimo Pie Corporation using the sustainable growth model.
Sustainable Growth Model (SGM) = ROE * (1-PR) ROE = Return on Equity PR = Payout Ratio
ROE = Net Income/ Stockholders Equity = 2526 / 19496 = 12.95%
PR = Dividends per Share / Earnings per Share = .40 / .76 = 52.6%
SGM = 12.95% * (1-52.6%) = 12.95% * (.474) = 6.14%
Calculating WACC:
First step in calculating WACC is to use the Capital Asset Pricing Model (CAPM)
CAPM = Rf + Beta (MRP) Rf = Risk Free Rate Beta = Market figure as to how stock reacts to market fluctuations MRP = Market return rate – risk free rate
Rf = 7.92% (Figured using 30-year Treasury Bond Yeild) Beta = 1.23 (Calculated using the average of all copetitors) MRP = 7.5% (Prime Rate in Exhibit 9)
CAPM = 7.92% + 1.23(7.5%) = 7.92% + 9.23% = 17.15%
WACC = Kd (1-t) * D/(D/E) + Ke * E/(D+E) Kd = Cost of Debt T = Tax Rate D = Debt E = Equity Ke = Cost of Equity Kd = Interest/Long Term Debt = 67/744 = 9.01% T = 40% D = 744 E = 19496 Ke = 17.15%
WACC = .0901(1-.4)*(744/(744+19496)n+ .1715*(19496/(19496+744) = .0541*(744/20240) + .1715(19496/20240) = .0020 + .1652 = 16.7%
Free Cash Flows of Eskimo Pie:
Net Sales = 47,198
COGS = 31,780
Net Income = 2526
Depreciation = 1352
Capital Expenditures = 1311
Net Working Capital = 905
FCF = 2526+1352-1311-905 = 1662
Terminal Value for Eskimo Pie 1990:
Value = (FCF *(1+g))/(WACC-g)
FCF = 1662
G = 6.14%
WACC = 16.7%
Enterprise Value = 1662*1.0614/(.167-.0614) = 1764.05/ .1056 = 16,705
+ Cash = 13,191
- Long-term Debt = 744
Equity Value = 29,152
Number of Shares = 3,316
Equity value per share = 9.05