In: Finance
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 7% rate. Dantzler's WACC is 11%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $21 | $31 | $58 |
WACC= | 11.00% | ||||||
Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 0 | 0.00% | -21 | -21 | 1.11 | -18.9189 | |
2 | -21 | 0.00% | 31 | 31 | 1.2321 | 25.1603 | |
3 | 31 | 0.00% | 58 | A.1551.5 | 1609.5 | 1.367631 | 1176.85253 |
Long term growth rate (given)= | 7.00% | b.Value of Enterprise = | Sum of discounted value = | 1183.09 | |||
Where | |||||||
Total value = FCF + horizon value (only for last year) | |||||||
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate) | |||||||
Discount factor=(1+ WACC)^corresponding period | |||||||
Discounted value=total value/discount factor |
C
Enterprise value = Equity value+ MV of debt |
1183.09 = Equity value+102.1 |
Equity value = 1080.99 |
share price = equity value/number of shares |
share price = 1080.99/32 |
share price = 33.78 |