Question

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 8% rate. Dantzler's WACC is 13%. Year 0 1 2 3 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ...... FCF ($ millions) - $24 $35 $57 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.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places. $ million What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places. $ million Suppose Dantzler has $145.80 million of debt and 12 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent. $

Answer 1

1). Horizon value = FCF4/(WACC - g) where

FCF4 = FCF3*(1+g); g = growth rate in perpetuity = 8%

FCF4 = 57*(1+8%) = 61.56

Horizon value = 61.56/(13% - 8%) = 1,231.20 million

2). Firm's market value today = Present Value of all FCFs + Present Value of Horizon value

Formula	Year (n)	1	2	3	Perpetuity
	Growth rate (g)				8%
	FCF	24	35	57	61.56
	Horizon value				1,231.20
	Total FCFs	24	35	57	1,231.20
1/(1+d)^n	Discount factor @ 13%	0.885	0.783	0.693	0.693
Total FCFs *Discount factor	PV of FCFs	21.24	27.41	39.50	853.28
Sum of all PVs	Firm Value	941.44

Firm's market value = 941.44 million

3). Equity value = Market value - debt = 941.44 - 145.80 = 795.64 million

Price per share = Equity value/number of shares = 795.64/12 = $ 66.30