Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five​ years: Year 1 2 3 4 5 FCF​ ($ million) 51.7 66.4 76.7 76.5 82.4 ​Thereafter, the free cash flows are expected to grow at the industry average of 4.3 % per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.2 %​: a.  Estimate the enterprise value of Heavy Metal. b.  If Heavy Metal has no excess​ cash, debt of $ 310 ​million, and 40 million shares​ outstanding, estimate its share price.

Answer 1

(a)-Enterprise value of Heavy Metal

Firm’s Enterprise value is the Present Value of the Free Cash Flows plus the Present Value of Terminal Value

Terminal Value (TV) = FCF5(1 + g) / (Ke – g)

= $82.40 Million(1 + 0.0430) / (0.1320 – 0.0430)

= $85.9432 Million / .0890

= $965.65 Million

Present Value of future cash inflows

Year	Cash Flow ($ in Million)	Present Value factor at 13.20%	Present Value of Free Cash Flow ($ in Million)
1	51.70	0.883392	45.67
2	66.40	0.780382	51.82
3	76.70	0.689383	52.88
4	76.50	0.608996	46.59
5	82.40	0.537982	44.33
5	965.65	0.537982	519.50
TOTAL			760.79

“Therefore, the Estimated Firm’s Enterprise value will be $760.79 Million”

(b)-Heavy Metals Share Price

The Value of Equity = Firm’s Enterprise Value - Market Value of Debt

= $760.79 Million - $310 Million

= $450.79 Million

Therefore, the share price today = Value of Equity / Number of shares of common stock outstanding

= $450.79 Million / 40 Million common shares outstanding

= $11.27 per share

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.