Question

randtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $4 million, $5 million, $8 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 4%. Brandtly's WACC is 14%, the market value of its debt and preferred stock totals $62 million; and it has 7 million shares of common stock outstanding. Write out your answers completely. For example, 13 million should be entered as 13,000,000. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations. $ What is the firm's horizon, or continuing, value? Round your answer to the nearest cent. $ What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations. $ What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations. $

Answer 1

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	4		4	1.14	3.5088
2	4	0.00%	5		5	1.2996	3.84734
3	5	0.00%	8		8	1.481544	5.39977
4	8	0.00%	16		16	1.68896016	9.47328
	Long term growth rate (given)=	4.00%			PV of future CF=	Sum of discounted value =	22.23

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	4		4	1.14	3.5088
2	4	0.00%	5		5	1.2996	3.84734
3	5	0.00%	8		8	1.481544	5.39977
4	8	0.00%	16	166.4	182.4	1.68896016	107.99544
	Long term growth rate (given)=	4.00%			Value of Enterprise =	Sum of discounted value =	120.75

Enterprise value = Equity value+ MV of debt

120.75 = Equity value+62

Equity value = 58.75

share price = equity value/number of shares

share price = 58.75/7

share price = 8.39