Question
In: Finance
Angel Enterprise was going public in 2018. You were wondering whether the $30 per share offer...
Angel Enterprise was going public in 2018. You were wondering whether the $30 per share offer price is a fair price. You decided to use discounted cash flow approach to value the company’s stock. You gathered the following data:
|
Year |
FCF |
Other Data |
|
2019 |
$600,000 |
Growth rate of FCF beyond 2023 = 3% |
|
2020 |
$900,000 |
Weighted Average Cost of Capital (WACC) = 10% |
|
2021 |
$1,400,000 |
The firm has no debt |
|
2022 2023 |
$1,800,000 $2,500,000 |
Number of common shares outstanding = 1,000,000 |
a. Based on your valuation, what is the common stock per share? Is the stock worth buying?
b. What is the common stock per share if the terminal growth rate (growth rate beyond 2023) were 5% instead of 3%?
Please cut and paste your Excel spreadsheet here.
** I need help with the equations
Solutions
Expert Solution
| 2019 | 2020 | 2021 | 2023 | 2024 | ||
| FCF | $ 6,00,000 | $ 9,00,000 | $ 14,00,000 | $ 18,00,000 | $ 25,00,000 | |
| PVIF at 10% | 0.90909 | 0.82645 | 0.75131 | 0.68301 | 0.62092 | |
| PV at 10% | $ 5,45,455 | $ 7,43,802 | $ 10,51,841 | $ 12,29,424 | $ 15,52,303 | |
| Cumulative PV t1 to t4 | $ 51,22,824 | |||||
| Continuing value of FCF = 2500000*1.03/(0.10-0.03) = | $ 3,67,85,714 | |||||
| PV of continuing value of FCF = 36785714*0.62092 = | $ 2,28,40,986 | |||||
| Value of the firm | $ 2,79,63,810 | |||||
| Number of common shares | 1000000 | |||||
| Value per share | $ 27.96 | |||||
| As the value of the share based on the FCF discounting method is lower than the offer price, the stock is not worth | ||||||
| buying. | ||||||
| IF GROWTH RATE IS 5%: | ||||||
| 2019 | 2020 | 2021 | 2023 | 2024 | ||
| FCF | $ 6,00,000 | $ 9,00,000 | $ 14,00,000 | $ 18,00,000 | $ 25,00,000 | |
| PVIF at 10% | 0.90909 | 0.82645 | 0.75131 | 0.68301 | 0.62092 | |
| PV at 10% | $ 5,45,455 | $ 7,43,802 | $ 10,51,841 | $ 12,29,424 | $ 15,52,303 | |
| Cumulative PV t1 to t4 | $ 51,22,824 | |||||
| Continuing value of FCF = 2500000*1.05/(0.10-0.05) = | $ 5,25,00,000 | |||||
| PV of continuing value of FCF = 52500000*0.62092 = | $ 3,25,98,300 | |||||
| Value of the firm | $ 3,77,21,124 | |||||
| Number of common shares | 1000000 | |||||
| Value per share | $ 37.72 | |||||
| As the value of the share based on the FCF discounting method is higher than the offer price, the stock is worth | ||||||
| buying. | ||||||
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Angel Enterprise was going public in 2018. You were wondering
whether the $30 per share offer price is a fair price. You decided
to use discounted cash flow approach to value the company’s stock.
You gathered the following data: Year FCF Other Data 2019 $600,000
Growth rate of FCF beyond 2023 = 3% 2020 $900,000 Weighted Average
Cost of Capital (WACC) = 10% 2021 $1,400,000 The firm has no debt
2022 2023 $1,800,000 $2,500,000 Number of common shares outstanding
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