Question

You’ve been hired by the firm of JB and Makya, Inc. as an analyst. They would like you to utilize the corporate valuation model in determining the stock price of Purina. You estimate the following cash flows for Purina. After the third year, you expect the growth rate to be 5%. Purina has $200 million currently in debt and 5 million shares of stock outstanding. Assuming an 8% required return, what is the intrinsic value of Purina’s stock?

CF1= %15 million

CF2= $25 million

CF3= $32 million

Answer 1

CF1 = $ 15 million

CF2 = $ 25 million

CF3 = $ 32 million

Growth Rate = 5%

Required Return = 8%

Value of CFs received after year 3 at the end of year 3 (Terminal CF) = CF3 x (1+g) / (Ke-g)

Value of CFs received after year 3 at the end of year 3 (Terminal CF) = 32 x (1+5%) / (8%-5%)

Value of CFs received after year 3 at the end of year 3 (Terminal CF) = $ 1,120 million

Year	CF	PVF@8%	PV
1	15	0.9259	13.89
2	25	0.8573	21.43
3	32+1120=1152	0.7938	914.49
		PV of CF	949.82

Therefore value of firm = $ 949.82 million

Value of Debt = $200 million

Value of Equity = Value of firm - Value of Debt

Value of Equity = 949.82 -200

Value of Equity = $ 749.82 million

No of o/s shares = 5 million shares

Intrinsic Value per share = Value of Equity / No of outstanding shares

Intrinsic Value per share = 749.82 / 5

Intrinsic Value per share = $ 149.96 approx. $150 per share