In: Finance
Company A has the following free cash flows for the next three years: FCF1=-20million, FCF2=30million, and FCF3=40million. After year 3, FCF is expected to grow at a constant 7% rate. WACC is 13%. What is the horizon value?What is the firm’s value today?Suppose the company has $100 million in debt and 10 million shares of stock outstanding. What is the firm’s estimated intrinsic value per share of common stock?
1) | Horizon Value | $ 71,33,33,333 | ||||||||
2) | Firm's Value today | $ 52,78,93,074 | ||||||||
3) | Intrinsic Value per share | $ 42.79 | ||||||||
Working: | ||||||||||
Horizon value is the present value of cash flow at the time when growth is stable. | ||||||||||
a. | ||||||||||
Horizon value | = | FCF3*(1+g)/(K-g) | Where, | |||||||
= | 40000000*(1+0.07)/(0.13-0.07) | FCF3 | $ 4,00,00,000 | |||||||
= | $ 71,33,33,333 | g | 7% | |||||||
K | 13% | |||||||||
b. | ||||||||||
Present Value horizon value | = | $ 71,33,33,333 | x | (1.13^-3) | ||||||
= | $ 49,43,75,782 | |||||||||
c. | ||||||||||
Present value of yearly cash flow | ||||||||||
Year | Cash flow | Discount factor | Present Value | |||||||
1 | $ -2,00,00,000 | 0.8850 | $ -1,76,99,115 | |||||||
2 | $ 3,00,00,000 | 0.7831 | $ 2,34,94,401 | |||||||
3 | $ 4,00,00,000 | 0.6931 | $ 2,77,22,006 | |||||||
Total | $ 3,35,17,292 | |||||||||
d. | ||||||||||
Total Present value today | = | $ 49,43,75,782 | + | $ 3,35,17,292 | ||||||
= | $ 52,78,93,074 | |||||||||
e. | ||||||||||
Total Present value today | $ 52,78,93,074 | |||||||||
Less:Debt | $ 10,00,00,000 | |||||||||
Value of shares outstanding | $ 42,78,93,074 | |||||||||
No. of shares outstanding | 1,00,00,000 | |||||||||
Value per share | $ 42.79 | |||||||||