Question

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public? offering, managers at Nabor have decided to make their own estimate of the? firm's common stock value. The? firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.

The? firm's weighted average cost of capital is 15 % and it has $1,830,000 of debt at market value and $370,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5? years, 2016 through? 2020, are given in the? table. Beyond 2020 to? infinity, the firm expects its free cash flow to grow by 5 % annually.

2016	?$280,000
2017	?$320,000
2018	?$360,000
2019	?$430,000
2020	$470,000

a.??Estimate the value of Nabor? Industries' entire company by using the free cash flow valuation model.

b.??Use your finding in part a?, along with the data provided? above, to find Nabor? Industries' common stock value.

c.??If the firm plans to issue 200,000 shares of common? stock, what is its estimated value per? share?

Answer 1

1)Terminal value at year 2020 :FCF 2020(1+g)/(WACC-G)

              470000(1+.05)/(.15-.05)

               470000*1.05 /.10

                4935000

Present value of FCF =[PVF15%,1*FCF1]+[PVF15%,2*FCF2]+/..........+[PVF15%,5*Terminal value]

=[.86957*280000]+[.75614*320000]+[.65752*360000]+[.57175*430000]+[.49718*470000]+[.49718*4935000]

= 243479.6+ 241964.8+ 236707.2+ 245852.5+ 233674.6+ 2453583.3

= 3655262

b)Value of common stock =Value of firm -value of debt -value of preferred stock

       = 3655262 - 1830000-370000

       =1455262

c)price per share =1455262/ 200000

             = $ 7.28 per share