Statistics Solutions

(See Solution) - Stock Valuation (20 points) Valeant Pharmaceuticals (VRX) has 187m shares outstanding, $26.7 billion in debt and $807m in cash. It projects

Question: – Stock Valuation (20 points)

Valeant Pharmaceuticals (VRX) has 187m shares outstanding, $26.7 billion in debt and $807m in cash. It projects free cash flows for next 2 years based on earnings forecasts below, a marginal tax rate of 24%, capital expenditures increasing from $175m in Year 1 to $190m by Year 2, and increases in net working capital (NWC) are based on a NWC-to-Sales ratio of 5% per year.

Forecasts ($m) Year 0 Year 1 Year 2
Sales $10,287 $13,095 $14,117
Growth vs Prior Year 27.3% 7.8%
Cost of Goods Sold ($3,274) ($3,529)
Gross Profit $9,822 $10,588
Other Operating Expenses ($262) ($282)
SG&A ($2,619) ($2,823)
Depreciation ($171) ($171)
EBIT $6,770 $7,311
  1. Determine VRX’s free cash flow each year. (10 points)
  2. Suppose VRX’s free cash flow is expected to grow at 1% after Year 2. If VRX’s weighted average cost of capital (WACC) is 16.7%, what is the value of VRX’s stock? (10 points)

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