Question

Omni Consumer Products Co. is expected to generate a free cash flow (FCF) of $2,875.00 million this year (FCF₁ = $2,875.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Omni Consumer Products Co.’s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Omni Consumer Products Co.? (Note: Round all intermediate calculations to two decimal places.)

$94,674.30 million

$9,029.35 million

$95,533.21 million

$78,895.25 million

Omni Consumer Products Co.’s debt has a market value of $59,171 million, and Omni Consumer Products Co. has no preferred stock. If Omni Consumer Products Co. has 225 million shares of common stock outstanding, what is Omni Consumer Products Co.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$262.98

$86.66

$96.43

$87.66

Answer 1

a)

Free cash flow for year 1 has been provided

- FCF is expected to grow over the following two years (FCF₂ and FCF₃) at rate (g) = 20.20% per year

therafter FCF will grow(g1) = 2.46% per year forever

WACC = 7.38%

Calculating the Enterprise Value ($ millions):-

EV = 2677.41 + 2997.06 + 3354.88 + 69,865.99

EV = $78,895.25 millions

So, the current total firm value of Omni Consumer Products Co. is $78,895.25 millions

Option 4

b).

- Enterprise Value = Market Value of equity + Market Value of Debt

$78,895.25 millions = Market Value of equity + $59,171 million

Market Value of equity= $19,724.25 million

- Intrinsic Price per share = Market Value of equity/No of shares outstanding

= $19,724.25 million/225 million

Intrinsic Price per share = $87.66

Option 4