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

jeff jeffy answered 1 month ago

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