Kollmorgen Corporation, a diversified technology company, reported sales of $194.9 million in 1992 and had a net loss of $1.9 million in that year. Its net income had traced a fairly volatile course over the previous five years.
|
Year |
Net Income |
|
1987 |
$0.3 million |
|
1988 |
$11.5 million |
|
1989 |
-$2.4 million |
|
1990 |
$7.2 million |
|
1991 |
-$4.6 million |
The stock had a beta of 1.20 and the normalized net income is expected to increase 6% a year until 1996, after which the growth rate is expected to stabilize at 5% a year (The beta will drop to 1.00). The depreciation amounted to $8 million in 1992 and capital spending amounted to $10 million in that year. Both items are expected to grow 5% a year in the long term. The firm expects to maintain a debt ratio of 35%. (The treasury bond rate is 7%.)
a. Assuming that the average earnings from 1987 to 1992 represents the normalized earnings, estimate the normalized earnings and free cash flow to equity.
b. Estimate the value per share.