Question

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dantzler's WACC is 10%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
	.......	.......	.......	.......	.......	.......	.......	......
FCF ($ millions)			- $25		$26		$60

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
   $ __________ million
   
2. What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
   $ __________ million
   
3. Suppose Dantzler has $172 million of debt and 20 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent.
   $ __________

Answer 1

Given:

WACC=10% , Growth Rate (g)= 7%

Schedule for Discount factor@10% calculated as follows:[1/(1+r)ⁿ]

Yr 1= [1/(1+0.10)¹] = 0.9090

Yr 2= [1/(1+0.10)²]= 0.8264

Yr 3= [1/(1+0.10)³]= 0.7513

Schedule for Discounted Free Cash Flows:

Year	1	2	3
FCF ($ millions)	-25	26	60
Discount Factor=WACC @10% (as calculated above)	0.9090	0.8264	0.7513
Present Value of Discounted Cash Flows	-22.725	21.4864	45.078

Total Present Value of DCF for the three years= -22.725+ 21.4864+45.078 = $ 43.8394 millions

a) Continuing Value/ Perpetuity is calculated as follows:-

PV of Terminal Value= [(FCF for Year 4)/ (WACC-g)] * discount factor of year 3

= [FCF₃*(1+g)/ (WACC-g)] * discount factor of year 3

= [ 60*(1+0.07)/(0.10-0.07)] * 0.7513

= [60*1.07/0.03] * 0.7513 = 2140* 0.7513 = $ 1607.782 million or $ 1607.78 million approx

b) Dantzer's current value of firm:Total Present Value of DCF for the three years+PV of Terminal Value

= ($ 43.8394+$ 1607.782)million

= $ 1651.62 million

c) Debt = $ 172 million No of shares Outstanding= 20 million

Value of Equity= Current value of firm- Debt = 1651.62-172 = $ 1479.62 million

Price per share= 1479.62/20 = $ 73.98 approx