Equity Valuation

Q: Assume you are valuing the UVW common shares. For this purpose, you assemble the below information about UVW from several sources. The UVW’s fiscal year ends on 31st December.
Extracts of Balance Sheet
(in millions of dollars)
For year ending 31st December Year 2023 Year 2022
Cash and cash equivalent 60 40
Net accounts receivable 1,100 900
Inventories 1,710 1,630
Other current assets 630 580
Total current assets 3,500 3,150
Gross fixed assets 4,200 3,800
Accumulated depreciation 1,500 1,250
Net fixed assets 2,700 2,550
Current liabilities 1,360 1,200
Long-term debt 2,300 2,500
Shareholders’ equity 2,540 2,000
Total liabilities and shareholders’
equity 6,200 5,700

Extracts of Income Statement
(in millions of dollars, except per share amounts)
Year 2023
Sales 6,500
Earnings before interest, taxes, depreciation and amortization (EBITDA) 1,450
Depreciation expense 250
Operating income 1,200
Net interest expense 200
Pretax income 1,000
Income tax (tax rate = 40%) 400
Net income 600
Earnings per share $1.5
Dividends per share $0.6

Selected Financial Data
Year 2023
Current share price $23
Number of outstanding shares 400 million
Pre-tax cost of debt 8%
Estimated beta 1.2
Risk-free rate 6%
Estimated Market return 11%

Additional information is shown as below:
In 2024, the sales, EBITDA and net income are expected to grow by 20%, compared to the 2023 data; the investment in fixed capital will grow at the same rate as net income; the non-cash working capital at the end of 2024 will be 130% of the 2024 EBITDA; the depreciation expense will remain unchanged.
• From 2025 and beyond, the sales and net income will grow forever at 6% annually; both investment in fixed capital and investment in working capital will grow at the same rate as net income; the depreciation expense will be 50% of the investment in fixed capital.
• The fixed capital expenditures are expected to remain at 50% of sales growth. The depreciation expense, which is the only non-cash charge, is expected to remain at 50% of the fixed capital expenditures. The investment in non-cash working capital will grow at the same rate as net income.
• 60% of future investments will be financed with equity and 40% will be financed with debt. The depreciation expense is the only non-cash charge.
• The company follows a stable dividend payout policy. There are no plans to issue additional shares or buy back existing shares.

Estimate the per-share value of the UVW shares at the beginning of 2024, using the Free Cash Flow to Equity Model.