Question

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 4% rate. Dantzler's WACC is 11%. Year 0 1 2 3 FCF(accordingly) ($ millions) - $25 $17 $54

What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. $ million

What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations. $ million

Suppose Dantzler has $161 million of debt and 32 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250. $

Answer 1

a. The horizon value is computed as shown below:

= [ FCCF in year 3 (1 + growth rate) ] / ( WACC - growth rate)

= [ $ 54 million (1 + 0.04) ] / (0.11 - 0.04)

= $ 56.16 million / 0.07

= $ 802.29 million

b. The amount is computed as follows:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)² + FCF3 / (1 + WACC)³ + 1 / (1 + WACC)³ [ ( FCF in year 3 (1 + growth rate) / (WACC - growth rate) ]

= - $ 25 million / 1.11 + $ 17 million / 1.11² + $ 54 million / 1.11³ + 1 / 1.11³ x [ ($ 54 million x 1.04) / (0.11 - 0.04)

= - $ 25 million / 1.11 + $ 17 million / 1.11² + $ 54 million / 1.11³ + 1 / 1.11³ x [ $ 802.2857143 million ]

= - $ 25 million / 1.11 + $ 17 million / 1.11² + $ 856.2857143 million / 1.11³  

= $ 617.3837931 million or $ 617.38 million Approximately

c. The current price per share is computed as follows:

= (Value computed in part b - amount of debt) / Number of shares outstanding

= ($ 617.3837931 million - $ 161 million) / 32 million shares

= $ 14.26