Use the Table for the Question(s) Below -Banco Industries Expect Sales to Grow at a Rapid Rate

question 9

Multiple Choice

Use the table for the question(s) below.
$\begin{array}{l}\text { FCF Forecast (\$ million) }\\\begin{array} { l l l l l l } \text { Year } & \mathbf { 0 } & \mathbf { 1 } & \mathbf { 2 } & \mathbf { 3 } & \mathbf { 4 } \\\text { Sales } & 240 & 270 & 290 & 310 & 325.5 \\\text { Growth versus Prior Year } & & 12.5 \% & 7.4 \% & 6.9 \% & 5.0 \% \\\text { EBIT (10\% of Sales) } & &27.00 & 29.00 & 31.00 & 32.55 \\\text { Less: Income Tax (37\%) } && ( 9.99 ) & 10.73 & 11.47 & 12.44 \\\text { Less: Inc. in NWC (12\% of Change in Sales) } && 3.6 & 2.4 & 2.4 & 1.86 \\\hline \text { Free Cash Flow } && 13.41 & 15.87 & 17.13 & 18.65\end{array}\end{array}$
-Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco Industries has a weighted average cost of capital of 12%, $50 million in cash, $60 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's share price at the start of year 1?

• A) $11.12
• B) $6.03
• C) $12.03
• D) $20.11

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