Question

Problem #1: Funkhouser Corporation, Inc. (FCI) is a fast-growing supplier of exercise equipment products.

The timeline below shows analysts’ projections for FCI’s free cash flows (FCFs) during the next 3 years;

For years after FCI’s 3-year “growth horizon”, analysts expect FCI’s FCF to grow at a constant 5% rate;

FCI experiences a weighted average cost of capital (WACC) of 11%;

FCI reports $112.6 million of debt on its latest balance sheet;

FCI has a simple capital structure with no preferred stock and reports 25 millions shares of common stock outstanding in its latest annual report.

Year                        0                       1                       2                     3

                                       |-----------------|-----------------|----------------|

FCF ($millions)      0                   (-$11)               $17                  $45

TASK: Please -

Estimate the “intrinsic value” (aka, estimated market price) per share of FCI’s common stock

Answer 1

We first need to calculate the value of firm.

Value of firm is present value of all cashlfows provided in the question.

where V3 is the horizon value, when the constant growth startes from year 4.

CF₄ = CF₄ * (1 + g) = 45 * (1 + 5%) = $47.25

V₃ = $787.5 mil

V0 = $612.50 mil

Value of Firm = value of Debt + value of Equity

=> Value of Equity = $612.50 mil - $112.50 mil = $500 mil

Per Share value = $500 mil/ 25 mil = $20 per share --> Answer