Question

Firm free cash flow to grow by 8% over the next 4 yrs, after it will decline to 4% for 3 yrs, then will level off to 2% growth indefinitely. Reported free cash flow $75,000,000.

WACC is 16%, what is the value of the firm today? show work

20,000,000 shares of stock, what should the value of the shares in the market (efficient market, no debt)? show work

Part (b) suppose there's $200,000,000 of debt. what would be the value of the shares (efficient market)? show work

Answer 1

a.

FCF 0 =7500000

growth rate for 1-4 years = 8%

FCF 1 = FCF0*(1+g)

=75000000*(1+8%) =81000000

FCF 2 =81000000*(1+8%) =87480000

FCF3 =87480000*(1+8%) =94478400

FCF4=94478400*(1+8%)=102036672

now growth rate for next 3 years =4%

FCF5=102036672*(1+4%) =106118138.9

FCF6 =106118138.9*(1+4%) =110362864.5

FCF7=110362864.5*(1+4%)=114777379.1

thereafter constant growth rate (g) =2%

WACC (k) =16%

Terminal value of firm at end of year 7 (from which perpetual growth rate starts) = FCF7*(1+g)/(k-g)

=114777379.1*(1+2%)/(16%-2%)

=836235190.6

Value of firm today is present value of all free cash flows and terminal value at terminal year at which perpetual growth rate starts

PV of firm formula = (FCF1/(1+k)^1) +(FCF2/(1+k)^2) + (FCF3/(1+k)^3) + ((FCF4/(1+k)^4) + (FCF5/(1+k)^5) + (FCF6/(1+k)^6) + ((FCF7+TV)/(1+k)^7)

=(81000000/(1+16%)^1) +(87480000/(1+16%)^2) + (94478400/(1+16%)^3)+(102036672/(1+16%)^4) + (106118138.9/(1+16%)^5) + (110362864.5/(1+16%)^6) + ((114777379.1+836235190.6)/(1+16%)^7)

=684039874.9

So value of firm today is $684039874.9

b.

No debt, so value of firm = value of equity

Price per share = value of equity/number of shares

=684039874.9/20000000

=34.20199375

So price of stock is $34.20

c.

Value of equity in efficent market = value of firm - value of debt

=684039874.9-200000000

=484039874.9

value per share = value of equity/number of shares

484039874.9/20000000

=24.20199375

So price of stock is $24.20