Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five​ years:
(in millions)

Year 1 : 54.4

Year 2: 66.2

Year 3: 79.5

Year 4: 73.6

Year 5: 80.2

Thereafter, the free cash flows are expected to grow at the industry average of 4.5% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14.6%​:

a.  Estimate the enterprise value of Heavy Metal.

b.  If Heavy Metal has no excess​ cash, debt of $304 ​million, and 41 million shares​ outstanding, estimate its share price.

Answer 1

a)	Enterprise value of Heavy Metal.		$ 653.75	million
Working:
As per discounted cash flow basis, value of the enterprise is the present value of future cash flows.
Step-1:Present value of cash flows of next 5 years
Year	Cash flow	Discount factor	Present value
a	b	c=1.146^-a	d=b*c
1	$       54.4	0.8726	$    47.47
2	$       66.2	0.7614	$    50.41
3	$       79.5	0.6644	$    52.82
4	$       73.6	0.5798	$    42.67
5	$       80.2	0.5059	$    40.57
Total			$ 233.94
Step-2:Present value of cash flows after year 5
Present value	=	C5*(1+g)/(K-g)*DF5			Where,
	=	$ 419.80			C5	Cash flow of year 5	$       80.2
					g	Growth rate	4.50%
					K	Required return	14.60%
					DF5	Discount factor of year 5	0.5059
Step-3:Sum of present value of future cash flows
Sum of present value of future cash flows	=	$ 233.94	+	$ 419.80
	=	$ 653.75
So, value of entrerprise is		$ 653.75	million
b)	Share price	$       8.53
Working;
	Value of enterprise	$ 653.75	million
	Less: Debt	$ 304.00	million
	Value of Equity	$ 349.75	million
	/ shares outstanding	41	million
	Share price	$       8.53