Question

Consider a company that is financing an expansion, with the expansion financed by
the owners. Projected free cash flows are -$25 million in year 1, +$10 million in year 2, +30 million
in year 3, and +$50 million in year 4. After year 4, the cash flows are expected to grow at a constant
rate of 6%. For the company, the weighted average cost of capital is 14%, short-term investments
for the company are $80 million, company debt is at $150 million, the amount of preferred stock
is at $30 million, and there are 5 million shares outstanding. A.) Using a free cash flow valuation
approach, what is the value from operations for the company? B.) What is the total intrinsic value
of the company? C.) What is the estimated intrinsic value of the equity? D.) What is the estimated
intrinsic stock price per share?

Answer 1

a

	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%	-25		-25	1.14	-21.9298
2	-25	0.00%	10		10	1.2996	7.69468
3	10	0.00%	30		30	1.481544	20.24915
4	30	0.00%	50	662.5	712.5	1.68896016	421.8572
	Long term growth rate (given)=	6.00%			Value of Enterprise =	Sum of discounted value =	427.87
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 4 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

b

Enterprise value = Equity value+ MV of debt+ MV of preferred stock

- Short term investments

427.87 = Equity value+150+30-80

Equity value = 327.87

c

share price = equity value/number of shares

share price = 327.87/5

share price = 65.57