Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five​ years:

Year	1	2	3	4	5
FCF​ ($ million)	51.8	67.6	78.6	74.3	80.8

​Thereafter, the free cash flows are expected to grow at the industry average of

3.5 %

per year. Using the discounted free cash flow model and a weighted average cost of capital of

13.6 %:

a.  Estimate the enterprise value of Heavy Metal.

b.  If Heavy Metal has no excess​ cash, debt of

$ 283

​million, and

45

million shares​ outstanding, estimate its share price.

a.  Estimate the enterprise value of Heavy Metal.

Answer 1

Given for Heavy Metal Corporation

Future cash flow

Year	1	2	3	4	5
FCF​ ($ million)	51.8	67.6	78.6	74.3	80.8

After year 5, constant growth rate is 3.5%

WACC KC = 13.6%

1st calculating firms value at year 5 using constant growth rate model

Terminal value at year 5 = FCFF6/(Kc-g)

TV5 = 80.8*1.035/(0.136-0.035) = $ 828 million

a). Today's Enterprise value using Discounted cash flow is sum of present value of future cash flows and present value of TV5

EV0 = FCFF1/(1+Kc) + FCFF2/(1+Kc)^2 + FCFF3/(1+Kc)^3 + FCFF4/(1+Kc)^4 + FCFF5/(1+Kc)^5 + TV5/(1+Kc)^5

EV0 = 51.8/(1+0.136) + 67.6/(1+0.136)^2 + 78.6/(1+0.136)^3 + 74.3/(1+0.136)^4 + 80.8/(1+0.136)^5 + 828/(1+0.136)^5 = $676.58 million

enterprise value of Heavy Metal. = $676.58 million

b).

If Heavy Metal has no excess​ cash,

debt = $283 ​million

shares​ outstanding = 45 million

We know that Enterprise value = Market value of Debt + Market value equity - Cash

So, 676.58 = 283 + Market value of equity

So, Market value of equity = $393.58 million

Market value of equity = current share price * number of shares outstanding

So, 393.58 = CMP*40

Share price = $9.84