Question

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $4 million, $7 million, $11 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Brandtly's WACC is 16%, the market value of its debt and preferred stock totals $52 million, the firm has $16 million in non-operating assets, and it has 25 million shares of common stock outstanding.

1. What is the present value of the free cash flows projected during the next 4 years? Do not round intermediate calculations. Round your answer to the nearest dollar. Write out your answers completely. For example, 13 million should be entered as 13,000,000.
   $   24534308.15
2. What is the firm's horizon, or continuing, value? Round your answer to the nearest dollar. Write out your answers completely. For example, 13 million should be entered as 13,000,000.$   190222222
3. What is the market value of the company's operations? Do not round intermediate calculations. Round your answer to the nearest dollar. Write out your answers completely. For example, 13 million should be entered as 13,000,000. $   129592348.1
4. What is the firm's total market value today? Do not round intermediate calculations. Round your answer to the nearest dollar. Write out your answers completely. For example, 13 million should be entered as 13,000,000. $ ?  
5. What is an estimate of Brandtly's price per share? Do not round intermediate calculations. Round your answer to the nearest cent. $ ?

Answer 1

a]

present value of each cash flow = future cash flow / (1 + WACC)^{number of years}

Present value of next 4 years cash flows = $24,534,308

b]

Horizon value = Year 4 cash flow * (1 + constant growth rate) / (WACC - constant growth rate)

Horizon value = $16,000,000 * (1 + 7%) / (16% - 7%)

Horizon value = $190,222,222

c]

Market value of operations = present value of next 4 years cash flows + present value of horizon value

present value of horizon value = $190,222,222 / (1 + 16%)⁴ = $105,058,040

Market value of operations = $24,534,308 + $105,058,040

Market value of operations = $129,592,348

d]

Firm's total market value = market value of operations - market value of debt and preferred stock + market value of non-operating assets

Firm's total market value = $129,592,348 - $52,000,000 + $16,000,000

Firm's total market value = $93,592,348

e]

Price per share = Firm's total market value / shares outstanding

Price per share = $93,592,348 / 25,000,000

Price per share = $3.74