Question
In: Finance
Slalom Corporation retains and reinvests all its earnings. So, Slalom does not pay any dividends, and...
Slalom Corporation retains and reinvests all its earnings. So, Slalom does not pay any dividends, and it has no plans to pay dividends any time soon. A major pension fund is interested in purchasing Slalom’s stock. The pension fund manager has estimated Slalom’s free cash flows for the next 3 years as follows: $5,000,000, $9,000,000, and $12,000,000. After Year 3, free cash flow is projected to grow at a constant 4%. Slalom’s WACC is 10%, the market value of its debt and preferred stock totals $27,272,727, Slalom has $10,000,000 in non-operating assets, and it has 5,000,000 shares of common stock outstanding. Based on this information answer the following questions:
a. What is the value of the company’s operations? (please round your answer to the nearest whole number)
b. What is the value of the company? (please round your answer to the nearest whole number)
Solutions
Expert Solution
| WACC= | 10.00% | ||||||
| Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 0.00% | 5000000 | 5000000 | 1.1 | 4545454.546 | |
| 2 | 5000000 | 0.00% | 9000000 | 9000000 | 1.21 | 7438016.529 | |
| 3 | 9000000 | 0.00% | 12000000 | 208000000 | 220000000 | 1.331 | 165289256.2 |
| Long term growth rate (given)= | 4.00% | a.Value of Enterprise = | Sum of discounted value = | 177272727.3 | |||
| Where | |||||||
| Total value = FCF + horizon value (only for last year) | |||||||
| Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate) | |||||||
| Discount factor=(1+ WACC)^corresponding period | |||||||
| Discounted value=total value/discount factor |
b
| Enterprise value = Equity value+ MV of debt+non operating assets |
| 177272727.27 = Equity value+27272727+10000000 |
| Equity value = 140000000.27 |
| share price = equity value/number of shares |
| share price = 140000000.27/5000000 |
| share price = 28 |
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