Question

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public​ offering, managers at Nabor have decided to make their own estimate of the​ firm's common stock value. The​ firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.

The​ firm's weighted average cost of capital is 12%​, and it has $1,970,000 of debt at market value and $390,000

of preferred stock in terms of market value. The estimated free cash flows over the next 5​ years, 2020 through 2024​,

are given in the​ table,

Beyond 2024 to​ infinity, the firm expects its free cash flow to grow by 3% annually.

2020   $220,000
2021   $280,000
2022   $320,000
2023   $390,000
2024   $430,000

a.  Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation model.

b.  Use your finding in part a, along with the data provided​ above, to find Nabor​ Industries' common stock value.

c.  If the firm plans to issue 200,000 shares of common​ stock, what is its estimated value per​ share?

Answer 1

a

	WACC=	12.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	220000		220000	1.12	196428.5714
2	220000	0.00%	280000		280000	1.2544	223214.2857
3	280000	0.00%	320000		320000	1.404928	227769.6793
4	320000	0.00%	390000		390000	1.57351936	247852.0506
5	390000	0.00%	430000	4921111.111	5351111.111	1.762341683	3036364.152
	Long term growth rate (given)=	3.00%			Value of Enterprise =	Sum of discounted value =	3931628.74
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

b

Enterprise value = Equity value+ MV of debt+ MV of preferred stock

3931628.74 = Equity value+1970000+390000

Equity value = 1571628.74

c

share price = equity value/number of shares

share price = 1571628.74/200000

share price = 7.86