Company A has the following free cash flows for the next three years: FCF1=-20million, FCF2=30million, and...

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?

Expert Solution

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

jeff jeffy answered 3 years ago

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