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Category > Management Posted 28 Oct 2017 My Price 8.00

Kenneth Cole

Consider the valuation of Kenneth Cole Productions in Example 9.7.

a. Suppose you believe KCP’s initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these forecasts?

b. Suppose you believe KCP’s EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP’s initial revenue growth at 9%)?

c. Suppose you believe KCP’s weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP’s initial rev- enue growth and EBIT margin at 9%)?

d. What range of share prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously?

E xample 9.7

Valuing Kenneth Cole Using Free Cash Flow

Kenneth Cole (KCP) had sales of $518 million in 2005. Suppose you expect its sales to grow at a 9% rate in 2006, but that this growth rate will slow by 1% per year to a long-run growth rate for the apparel industry of 4% by 2011. Based on KCP’s past profitability and investment needs, you expect EBIT to be 9% of sales, increases in net working capital requirements to be 10% of any increase in sales, and net investment (capital expenditures in excess of depreciation) to be 8% of any increase in sales. If KCP has $100 million in cash, $3 million in debt, 21 million shares outstanding, a tax rate of 37%, and a weighted average cost of capital of 11%, what is your estimate of the value of KCP’s stock in early 2006?

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Maurice Tutor
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Status NEW Posted 28 Oct 2017 08:10 AM My Price 8.00

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