Question

CORPORATE VALUATION

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 5% rate. Dantzler's WACC is 10%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
	.......	.......	.......	.......	.......	.......	.......	......
FCF ($ millions)			- $12		$24		$48

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.
   $  million
   
2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.
   $  million
   
3. Suppose Dantzler has $94 million of debt and 23 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

Answer 1

Part a:
Horizon, or continuing value refers to the terminal value.
The terminal value is calculated as:
Terminal value=(Cash flow in year 3)*(1+Growth rate)/(WACC-Growth rate)

Free cash flow in year 3=$48
Growth rate=5%
Weighted average cost of capital (WACC)=10%
Terminal value= 48*(1+5%)/(10%-5%)=48*(1.05)/(0.05)=1008

Horizon, or continuing value=$1008 million=$1008*1000000=$1008000000

Part b:
To calculate the firm's value today, we need to discount the cash flows in year 1,2,3 and the terminal value to present value using the discount rate of 10%.
Present value=-12/(1+10%)^1+24/(1+10%)^2+48/(1+10%)^3+1008/(1+10%)^3
=-12/(1.1)^1+24/(1.1)^2+48/(1.1)^3+1008/(1.1)^3
=-12/1.1+24/1.21+48/1.331+1008/1.331
=-10.90909091+19.83471074+36.06311044+757.3253193
=802.3140496
The firm's value today=$802.3140496 million=$802.3140496*1000000=$802314049.6

Part c:
Firm's value=Debt + Equity
Firm's value-Debt=Equity
Given that the value of debt=$94 million
Value of equity=802.314-94=708.314 million
Number of shares outstanding=23 million
Price per share=(Value of equity)/(Number of shares outstanding)=708.314/23=30.796 or 30.80 (Rounded to two decimal places)
So, the per share price=$30.80