Question

In: Accounting

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):

  1. The enterprise value                                                                           

[5 marks]

  1. Equity value                                                                            

[2 mark]

  1. Equity value per share                                                                        

[1 mark]

  1. 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

Solutions

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 (CV*PV)            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

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