It is December 2019. Google has offered to buy your internet startup. The Google negotiators and...

It is December 2019. Google has offered to buy your internet startup. The Google negotiators and you both agree on the following expectations.

Year	Expected free cash flow (end of year)
2020	120,000
2021	180,000
2022	270,000
2023	360,000
2024	450,000

After 2024, cash flows are expected to grow by 5% per year. Based on the riskiness of your industry, you think that your weighted average cost of capital is 15%.

You have bank loans worth $400,000 outstanding.

What is the horizon value, i.e., the present value of all free cash flows from 2025 to infinity expressed in 2024-dollars?

What is the total value of the company?

What is the value per share of common stock if you have 100,000 shares outstanding?

Solutions

Expert Solution

1)Horizon value =CF 2024 (1+g)/(WACC -g)

= 450000(1+.05)/(.15-.05)

= 450000*1.05/ .10

= $ 4725000

2)Total value of company =[PVF15%,1*CF2020]+[PVF15%,2*CF2021]+....+[PVF15%,5*CF2024]+[PVF15%,5*Horizon value]

= [.86957*120000]+[.75614*180000]+[.65752*270000]+[.57175*360000]+[.49718*450000+[.49718*4725000]

= 104348.4+ 136105.2+ 177530.4+ 205830+ 223731+ 2349175.5

= 3196720.50

**find present value factor using the formula 1/(1+i)^n or from present value table

3)Value per share =[Total value of company- bank loan ]/number of shares outstanding

=[3196720.50-400000]/100000

= 2796720.5/100000

= $ 27.97 per share

jeff jeffy answered 1 year ago

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