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 |
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