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: $2 million, $5 million, $10 million, and $13 million. After the fourth year, free cash flow is projected to grow at a constant 8%. Brandtly's WACC is 11%, the market value of its debt and preferred stock totals $52 million, the firm has $15 million in non-operating assets, and it has 22 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.
   $  
2. 
   
3. 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.
   $  
4. 
   
5. 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.
   $  
   
   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.
   $  
6. 
   
7. What is an estimate of Brandtly's price per share? Do not round intermediate calculations. Round your answer to the nearest cent.
   $  

Answer 1

Answer a.

FCF1 = $2,000,000
FCF2 = $5,000,000
FCF3 = $10,000,000
FCF4 = $13,000,000

WACC = 11%

Present Value of FCF = $2,000,000 / 1.11 + $5,000,000 / 1.11^2 + $10,000,000 / 1.11^3 + $13,000,000 / 1.11^4
Present Value of FCF = $21,735,330

Answer b.

FCF4 = $13,000,000
Growth Rate = 8%

FCF5 = FCF4 * (1 + Growth Rate)
FCF5 = $13,000,000 * 1.08
FCF5 = $14,040,000

Horizon Value = FCF5 / (WACC - Growth Rate)
Horizon Value = $14,040,000 / (0.11 - 0.08)
Horizon Value = $468,000,000

Answer c.

Present Value of Horizon Value = $468,000,000/1.11^4
Present Value of Horizon Value = $308,286,096

Market Value of Operations = Present Value of FCF + Present Value of Horizon Value
Market Value of Operations = $21,735,330 + $308,286,096
Market Value of Operations = $330,021,426

Answer d.

Market Value today = Market Value of Operations
Market Value today = $330,021,426

Answer e.

Market Value of Equity = Market Value today - Market Value of Debt and Preferred Stock + Market Value of Non-Operating Assets
Market Value of Equity = $330,021,426 - $52,000,000 + $15,000,000
Market Value of Equity = $293,021,426

Price per share = Market Value of Equity / Number of Shares Outstanding
Price per share = $293,021,426 / 22,000,000
Price per share = $13.32