Question

UBTECH Robotics is expected to generate the following free cash flows over the next five years. After which, the free cash flows are expected to grow at the industry average of 3% per year. Using the discounted free cash flow model and the weighted average cost of capital of 11%

UBTECH Robotics FCF Forecast ($ Millions) Year 1999, 2000, 2001, 2002, 2003, 2004

FCF (Amount in Millions)$55, $45, $89, $102, $84, $87

a. Estimate the enterprise value (V0) of UBTECH Robotics.

b. If UBTECH Robotics has excess cash of $5.6 Billion, a debt of $800 Million and 50 Million shares outstanding, estimate its share price (P0).

Answer 1

a)

EV = PV of FCF

To calculate the present value of free cash flows, we will:

i) Discount the FCF given for 5 years period, along with

ii) Calculate Perpetual value of the firm

i)

Year	FCF ($ Millions)	PVF @ 11%	PV of FCF
1999	55	0.900901	49.5495
2000	45	0.811622	36.5230
2001	89	0.731191	65.0760
2002	102	0.658731	67.1906
2003	84	0.593451	49.8499
2004	87	0.534641	46.5138
Total			314.7028

ii)

perpetual value of the firm at year end 2004 = FCF₂₀₀₄*(1+g) / (WACC-g)

= 87*(1+0.03)/ (0.11-0.03) = 1120.1250 => This is the value of firm in the year 2004, we now need to discount it to PV using 2004 DF @11% = 0.534641

= 1120.1250*534641 = 589.8646

Value of Firm (V0) = 314.7028+589.8646 = $913.5674 millions

b)

Price per share (P0) = (Value of firm (V0) + Excess cash available - Debt) / Number of shares

=(913.5674 + (5.6*1000) - 800) / 50 = 114.27 per share

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