Question

Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $12,815.00 million this year (FCF₁ = $12,815.00 million), and the FCF is expected to grow at a rate of 21.40% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.82% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Extensive Enterprise Inc.’s weighted average cost of capital (WACC) is 8.46%, what is the current total firm value of Extensive Enterprise Inc.? (Note: Round all intermediate calculations to two decimal places.)

$39,843.41 million

$371,649.42 million

$309,707.85 million

$384,157.24 million

Extensive Enterprise Inc.’s debt has a market value of $232,281 million, and Extensive Enterprise Inc. has no preferred stock. If Extensive Enterprise Inc. has 300 million shares of common stock outstanding, what is Extensive Enterprise Inc.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$257.09

$258.09

$774.27

$283.90

Answer 1

Question 1:

Option $309,707.85 million is correct

r = Required rate of return = WACC = 8.46%

g = growth rate = 21.4% for years 2 and 3 and 2.82% for year 4 to forever

FCF in Year 1 = $12,815 million

FCF in Year 2 = FCF in Year 1 * (1+g) = $12,815 * (1+21.4%) = $15,557.41 million

FCF in Year 3 = FCF in Year 2 * (1+g) = $15,557.41 * (1+21.4%) = $18,886.6957 million

FCF in Year 4 = FCF in Year 3 * (1+g) = $18,886.6957 * (1+2.82%) = $19,419.3005 million

Horizon value at the end of Year 3 for years 4 to forever = FCF in Year 4 / (r-g)

= $19,419.3005 / (8.46% - 2.82%)

= $19,419.3005 / 5.64%

= $344,313.839

Current Total firm value of Extensive Enterprise Inc. = Present value of FCF

= [FCF in Year 1 / (1+r)^1] + [FCF in Year 2 / (1+r)^2] + [FCF in Year 3 / (1+r)^3] + [Horizon Value / (1+r)^3]

= [$12,815 million / (1+8.46%)^1] + [$15,557.41 million / (1+8.46%)^2] + [$ $18,886.6957million / (1+8.46%)^3] + / [$344,313.839 / (1+8.46%)^3]

= [$12,815 million / 1.0846] + [$15,557.41 million / 1.17635716] + [$ $18,886.6957million / 1.27587698] + / [$344,313.839 / 1.27587698]

= $11,815.4158 million + $13,225.0736 million + $14,802.9128 million + $269,864.45 million

= $309,707.852 million

Therefore, Current total firm value of Extensive Enterprise Inc. = $309,707.85 million

Question 2:

Number of shares outstanding = 300 million

Current Firm total value = $309,797.85 million

Market value of Debt today = $232,281 million

Current value of common equity = Current firm total value - market value of debt today

= $309,797.85 million - $232,281 million

= $77,426.85 million

Extensive Enterprise Inc.’s estimated intrinsic value per share of common stock = Current value of common equity / number of shares outstanding

= $77,426.85 million / 300 million shares

= $258.0895

Extensive Enterprise Inc.’s estimated intrinsic value per share of common stock is $258.09 per share