Question

In: Finance

KANASAS FOOD has 300,000 shares outstanding, debt of $9,000,000, and cash of $400,000. The firm is...

KANASAS FOOD has 300,000 shares outstanding, debt of $9,000,000, and cash of $400,000. The firm is expecting fixed free cash flows of $2,000,000 for 2 years. After that, free cash flows are expected to grow by 7.0% per year. The weighted-average cost of capital for High Point Grill is 16.2%. Use DCF analysis to estimate the share price of KANSAS stock.

What is the price per share of KANASAS FOOD based on the discounted cash flow (DCF) method of valuation?

Solutions

Expert Solution

WACC= 16.20%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 2000000 2000000 1.162 1721170.396
2 2000000 0.00% 2000000 23260869.57 25260869.57 1.350244 18708373.87
Long term growth rate (given)= 7.00% Value of Enterprise = Sum of discounted value = 20429544.26
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 2 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor
Enterprise value = Equity value+ MV of debt
- Cash & Cash Equivalents
20429544.26 = Equity value+9000000-400000
Equity value = 11829544.26
share price = equity value/number of shares
share price = 11829544.26/300000
share price = 39.43

Related Solutions

Harris Shipping Company has excess cash of $300,000 and 200,000 total shares outstanding. The firm pays...
Harris Shipping Company has excess cash of $300,000 and 200,000 total shares outstanding. The firm pays no dividends and its net income for the year just ended is $100,000. The market value balance sheet at the end of the year is shown below. Assume that the entire amount of excess cash will be utilized for share repurchase at the current market price. Calculate the price-earnings ratio after the repurchase. Market Value Balance Sheet (before paying out excess cash) Excess Cash...
Slow Food has 400,000 shares of common stock outstanding. The common stock currently sells for $70...
Slow Food has 400,000 shares of common stock outstanding. The common stock currently sells for $70 per share. It is expected that common stock will pay $3 dividend next year and its growth rate is 4 percent. Fresh Food Company has 550,000 shares; 4% preferred stock outstanding. Preferred stock is currently sold at $95 per share and flotation (selling) cost is $2. Fresh Food has 160,000 of 10 percent annual interest bonds outstanding, price is 95% of the par value...
A firm has 2,000,000 shares of stock outstanding, total debt of $3,000,000 at an annual interest...
A firm has 2,000,000 shares of stock outstanding, total debt of $3,000,000 at an annual interest rate of 8% and annual depreciation expense of $300,000, and is considering borrowing an additional $6,000,000 at 8% and buying back one-half of those shares. Assuming EBIT of $1.2 million, what is this company’s cash coverage ratio (a) before and (b) after the proposed restructuring? What can you conclude about the impact of financial leverage on a firm’s cash coverage ratio?
Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at...
Use the following information for questions 1-7. A corporation has 9,000,000 shares of stock outstanding at a price of $40 per share. They just paid a dividend of $2 and the dividend is expected to grow by 5% per year forever. The stock has a beta of .9, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 300,000 bonds outstanding with a price of $1,100 per bond. The bond has a...
Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding,...
Spicer Reports Corp has 400,000 shares of common stock outstanding, 200,000 shares of preferred stock outstanding, and 40,000 bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for common stock equity in the computation of Spicer's WACC? A. 18.59% B. 19.49% C. 24.37% D. 62.50% E. 79.75% Comfort Chair, Inc. has a $1.5...
A firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was...
A firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was considering paying a cash dividend, corresponding to a 40% payout. The stock traded in the market at $88.00 per share. Assume that the average investor holds 156 shares of the company’s stock. Note: The term “k” is used to represent thousands (× $1,000). Required: What would be the average portfolio value after a re-purchase scenario? $Answerk Do not round intermediate calculations. Input your answer...
A firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was...
A firm has an excess cash flow of $4.8m. It had 3m shares outstanding and was considering paying a cash dividend, corresponding to a 40% payout. The stock traded in the market at $88.00 per share. Assume that the average investor holds 176 shares of the company’s stock. Note: The term “k” is used to represent thousands (× $1,000). Required: What would be the average portfolio value after a re-purchase scenario? $Answer Do not round intermediate calculations. Input your answer...
Sora Industries has 60 million outstanding​ shares, $122million in​ debt, $53 million in​ cash, and the...
Sora Industries has 60 million outstanding​ shares, $122million in​ debt, $53 million in​ cash, and the following projected free cash flow for the next four​ years: Year 0 1 2 3 4 Earnings and FCF Forecast​ ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year ​8.1% ​10.3% ​6.0% ​5.0% 3 Cost of Goods Sold ​(313.6) ​(345.7) ​(366.5) ​(384.8) 4 Gross Profit 154.4 170.3 180.5 189.5 5 ​Selling, General,​ & Admin. ​(93.6) ​(103.2) ​(109.4) ​(114.9) 6...
Sora Industries has 66 million outstanding​ shares, $124 million in​ debt, $50million in​ cash, and the...
Sora Industries has 66 million outstanding​ shares, $124 million in​ debt, $50million in​ cash, and the following projected free cash flow for the next four​ years: Year 0 1 2 3 4 Earnings and FCF Forecast​ ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year ​8.1% ​10.3% ​6.0% ​5.0% 3 Cost of Goods Sold ​(313.6) ​(345.7) ​(366.5) ​(384.8) 4 Gross Profit 154.4 170.3 180.5 189.5 5 ​Selling, General,​ & Admin. ​(93.6) ​(103.2) ​(109.4) ​(114.9) 6...
Edwards Construction currently has debt outstanding with a market value of $400,000 and a cost of...
Edwards Construction currently has debt outstanding with a market value of $400,000 and a cost of 8 percent. The company has an EBIT of $32,000 that is expected to continue in perpetuity. Assume there are no taxes. a. What is the value of the company’s equity and the debt-to-value ratio? (Do not round intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.) Equity value $...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT