Eskimo Pie

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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=...
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