1. At the beginning of its fiscal year 2020, an analyst made the following forecast for...

1. At the beginning of its fiscal year 2020, an analyst made the following forecast for Greenfield, Inc. (in millions of dollars):

	2020	2021	2022	2023
Cash flow from operation	$1,234	$2,568	$3,755	$2,100
Cash investment	428	489	502	756

Greenfield has a net debt of $1,950 at the end of 2019. Assume that free cash flow will grow at 4 percent per year in 2024 and 2025, after that this will grow at 5 percent per year. Greenfield had 425 million shares outstanding at the end of 2019, trading at $72.5 per share. Using a required return of 9 percent, calculate the following for Greenfield at the beginning of 2020 (You have to fill in the table below, and also show your working process):

The enterprise value

[5 marks]

Equity value

[2 mark]

Equity value per share

[1 mark]

Based on your estimate, should investors buy the share of this company?

[1 mark]

	2020	2021	2022	2023	2024	2025
Cash flow from operation
Cash investment
Free cash flow
Discount rate
PV of FCF
Total PV till 2023
Continuing value (CV)
PV of CV

Expert Solution

								($ in millions)
Particulars	2020	2021	2022	2023	2024	2025	2026 Onwards	Total
Cashflow from operation	1,234	2,568	3,755	2,100				9,657
Cash investment	-428	-489	-502	-756				-2,175
Free Cash Flow	806	2,079	3,253	1,344	1,398	1,454	1,526	11,860
PV of FCF @ 9%	0.92	0.84	0.77	0.71	0.65	0.60	25.00		PV for 2026 onward =1/(0.09-0.05)
*Total PV till 2023 (PV FCF)**	739	1,750	2,512	952				5,953
Continuing Value (CV)					1,398	1,454	1,526	4,378
*PV of CV (CVPV)**					908	867	38,159	39,934
Total PV as on 2020 (beg.)	739	1,750	2,512	952	908	867	38,159	45,887
* Free cash flow growth @ 4% for during 2024, 2025 and @ 5% during 2026.

	$
So, Enterprises Value	45,887


Equity Value (Enterprises values less debt value)	43,937


Equity Value per share (Equity Value/No. of shares)	103.38


Yes, investor should buy at $ 72.5 as value is higher
as per above calculation

ekkarill92 answered 3 years ago

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