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 5% rate. Dantzler's WACC is 14%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
	.......	.......	.......	.......	.......	.......	.......	......
FCF ($ millions)			- $18		$15		$53

1. 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
   
2. 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
   
3. Suppose Dantzler has $146.30 million of debt and 18 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

Part (a):

Dantzler’s horizon or continuing value:

PV of FCF4 onwards, as at the end of year 3= FCF3*(1+g)/(r-g)

Where FCF3= FCF for year 3 (given as $53 Million), g= constant growth rate (given as 5%) and r= WACC (given as 14%)

Plugging these values,

PV of FCF as at year 3 = $53*(1+0.05)/(0.14-0.05) = $618.33 Million

Part (b):

Firm’s market value today= Sum of PV of future FCFs using the formula FCF/(1+r)^n

Where r= WACC and n= respective year of the FCF.

Given, FCF1= -$18 Million, FCF2= $15 Million and FCF3= $53 Million

PV of FCFs after year 3, as at the end of year 3= $618.33 as in part (a).

Market value today= -18/(1+0.14) + 15/(1+0.14)^2 + 53/(1+0.14)^3 + 618.33/(1+0.14)^3

= -15.78947368 + 11.54201293 + 35.77349036 + 417.3573875 = $ 448.88 Million

Part (c ):

Given, value of debt= $146.30 Million and number of shares= 18 Million.

Market capitalization= Value of firm- Debt = $448.88 Million- $146.30 = $302.58 Million

Current price per share= Market capitalization/ Number of shares

= $302.58 Million/18 Million = $16.81