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

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

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings.

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $6 million, $10 million, and $15 million. After the...

Fickell Industries is growing rapidly and currently retains all of its earnings (i.e., no dividends). If...

Fickell Industries is growing rapidly and currently retains all of its earnings (i.e., no dividends). If is expected that Fickell will begin paying a $1.00 dividend 3 years from today. The dividend will grow by 50% in years 4 and 5. Thereafter (year 6 and beyond), dividend growth is expected to be a constant 8% per year. If the required return for Fickell Industries stock is 15%, what is the market price of Fickell stock?

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 75% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 10% per year. If the required return on the stock...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 75% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 70% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 7% per year. If the required return on the stock...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain...

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 70% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 6% per year. If the required return on the stock...

Question 1 a. Simpkins Corporation does not pay any dividends because it is expanding rapidly and...

Question 1 a. Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 70% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 4% per year. If the required return...

(Stocks) ABC Corp has a 10.7% return on equity and reinvests (retains) 34% of its profits....

(Stocks) ABC Corp has a 10.7% return on equity and reinvests (retains) 34% of its profits. What is the intrinsic value of the company's share of stock, to the nearest penny, if the required rate of return is 12.58% and the most recent annual dividend per share (D0) was $2.27? If your answer is, e.g., $45.365, record it as 45.37.

(Stocks) ABC Corp has a 14.18% return on equity and reinvests (retains) 37% of its profits....

(Stocks) ABC Corp has a 14.18% return on equity and reinvests (retains) 37% of its profits. What is the intrinsic value of the company's share of stock, to the nearest penny, if the required rate of return is 16.21% and the most recent annual dividend per share (D0) was $2.55? If your answer is, e.g., $45.365, record it as 45.37.

ABC Corp has a 11.96% return on equity and reinvests (retains) 33% of its profits. What...

ABC Corp has a 11.96% return on equity and reinvests (retains) 33% of its profits. What is the intrinsic value of the company's share of stock, to the nearest penny, if the required rate of return is 16.9% and the most recent annual dividend per share (D0) was $2.58?

Subjects