Question
In: Finance
1) You estimate Bayleaf Inc. has free cash flows of $70 million arriving in 1 year,...
1) You estimate Bayleaf Inc. has free cash flows of $70 million arriving in 1 year, $74 million in 2 years, and $80 million in 3 years. After year 3, the long term growth rate of FCF will be 3% (thus year 4 FCF is $82.4 million). Bayleaf has $241 million in net debt and a weighted average cost of capital of 14%. What is your estimate of the Enterprise Value of Bayleaf (in millions)?
2)You believe Orange Inc. has an enterprise value of $833 million. Orange's balance sheet shows $77 million in cash and $165 million in debt. What is your estimate for the stock price if Orange has 5 million shares outstanding?
Solutions
Expert Solution
| Solution 1 | |||||
| Year | Cashflow | PV factor @14% | Cashflow * PV factor | ||
| 1 | ###### | 0.8772 | $ 61.40 | ||
| 2 | ###### | 0.7695 | $ 56.94 | ||
| 3 | ###### | 0.6750 | $ 54.00 | ||
| 3 | ###### | 0.6750 | $ 505.62 | ||
| Current firm value | $ 677.96 | ||||
| Current Cashflow | $ 80.00 | ||||
| Rate of return | 14.00% | ||||
| Growth Rate | 3.00% | ||||
| Share Price as per Cashflow discount mode | =Current Cashflow*(1+Growth rate)/(Rate of return-Growth Rate) | ||||
| Share Price as per Cashflow discount mode | =80*(1+0.03)/(0.14-0.03) | ||||
| Answer | $ 749.09 | ||||
| Since Enterprise value includes the value of debt and hence PV of free cash flows will be the enterprise value i.e. 677.96 | |||||
| Solution 2 | |||||
| Enterprise value | $ 833.00 | million | |||
| Cash | $ 77.00 | million | |||
| Debt value | $(165.00) | million | |||
| Equity value | $ 745.00 | million | |||
| No of shares | 5.00 | million | |||
| Share price per share | =745/5 | ||||
| Share price per share | $ 149.00 | ||||
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