Question

CORPORATE VALUATION

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 $15 million. After the fourth year, free cash flow is projected to grow at a constant 4%. Brandtly's WACC is 13%, the market value of its debt and preferred stock totals $40 million; and it has 20 million shares of common stock outstanding.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.

$

What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.

$

What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.

$

What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations.

$

Answer 1

Answer 1

Year	FCF		PV Factor @ 13%		Present value
1	2	$ Million	0.885		1.770
2	25	$ Million	0.783		19.579
3	10	$ Million	0.693		6.931
4	15	$ Million	0.613		9.200
					37.479

Answer 2 The firm time horizon is upto perpetuity and continuing value is = $15(1+0.04)/(15%-4%) = 173.33$

Answer 3

	FCF after 4 year regular at 4%
	Then upto perpetuity		166.67
	Wacc = 13%
	Total cash flow from year 5 to end is				FCF/(Wacc-g)		PV Factor @ 13%		PV
				5th to end	166.67	$ million	0.543		90.46	$ million
				1	2	$ million	0.885		1.77	$ million
				2	25	$ million	0.783		19.58	$ million
				3	10	$ million	0.693		6.93	$ million
				4	15	$ million	0.613		9.20	$ million
						Total Value of Firm Today			127.94	$ million

Answer 4

	Total Value of Firm Today			127.94	$ million
less	Debt And Prefered stock			40	$ million
	Equity			87.94	$ million
	shares			20	million
	Current Value of share		=	4.397	$