Question

Cool Cargo Corporation is considering going public. Managers want to estimate common stock value. Cool Cargo’s CFO has collected data for valuation using the free cash flow method as follows…

The firm’s weighted average cost of capital is 11%, and it has $1.5 million of debt at market value, and $500,000 of preferred stock also at market value. The estimated free cash flows over the next 5 years, 2017-2021, are given as follows:

Year       Estimated Free Cash Flow

2017       $200,000

2018       $250,000

2019       $310,000

2020       $350,000

2021       $390,000

After 2020, to infinity, the firm expects free cash flow to grow at a rate of 3% per year.

Estimate the value of Cool Cargo’s entire company using the free cash flow valuation model.

Use your finding in part (a), along with the data provided above, to find Cool Cargo’s common stock value.

If the firm has 200,000 shares of common stock outstanding, what is its estimated value per common share?

Cool Cargo Corporation is too small to immediately become part of the S&P 500. How are stocks weighted in the S&P 500, and how is this different from the DJIA and NASDAQ 100? Which of the three indices is most representative of the U.S. stock market?

The above Free Cash Flow estimates were based on the 2017 tax code (i.e., before the recent income tax cuts were passed). Describe how you think the new corporate and personal income tax cuts passed by the Trump Administration and Congress effective 2018 will help or hurt Cool Cargo Corporation.

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I	J
2
3
4		Cost of Capital	0.11
5		Terminal Growth rate	0.03
6		Number of Common Shares	200000
7		Market Value of Debt	1500000
8		Market Value of Preferred Stock	500000
9
10		Calculation of value of the company:
11
12		All amount in million $
13		Year	0	1	2	3	4	5
14		Free Cash Flow		200000	250000	310000	350000	390000
15
16		Since terminal growth rate starts at year 6, value of terminal cash flow at the end of year 5 can be calculated as follows:
17		Terminal cash flow in year 5	=FCF6/(w-g)
18			=(I14*(1+D5))/(D4-D5)	=K68/(D33-D45)
19
20
21		Year	0	1	2	3	4	5
22		Free Cash Flow		=E14	=F14	=G14	=H14	=I14
23		Horizon value						=D18
24		WACC	=D4
25		Present Value Factor (P/F,i,n)		=1/(1+$D24)^E21	=1/(1+$D24)^F21	=1/(1+$D24)^G21	=1/(1+$D24)^H21	=1/(1+$D24)^I21
26		Present value of cash flows		=E22*E25	=F22*F25	=G22*G25	=(H22+H23)*H25	=(I22+I23)*I25
27		Present value of cash flows	=SUM(E26:I26)	=SUM(E26:I26)
28
29		Value of firm	=D27
30		Value of Debt	=D7
31		Value of Preferred Stock	=D8
32		Value of Common Equity	=D29-D30-D31
33		Number of share out standing	=D6
34
35		Value of Each Share	=Value of Equity / Number of shares outstanding
36			=D32/D33	=D32/D33
37
38		Hence
39		Value of entire company	=D27
40		Company's Stock Value	=D32
41		Hence value of each share is	=D36
42
43		In S&P 500, stocks are weighted on the basis of their market capitalization.
44
45		Dow Zones industrial average (DJIA) is calculated by adding prices of all 30 stocks and dividing it by a divisor.
46		In DJIA methodology, companies are ranked based on their share prices.
47
48		NASDAQ 100 is also calculated on weighted market capitalization method.
49		Top 100 companies with the highest market capitalization is included in the index.
50