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 7% rate. Dantzler's WACC is 15%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
FCF ($ millions)	.......	.......	.......	.......	.......	.......	.......	......
			- $21		$29		$52

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. 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

2. 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

3. Suppose Dantzler has $189 million of debt and 5 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

Question a:

g = growth rate = 7%

r = WACC = 15%

FCF4 = FCF3 * (1+g) = $52 million * (1+7%) = $55.64 million

Horizon Value = FCF4 / (r - g)

= $55.64 million / (15% - 7%)

= $695.5 million

Therefore, Dantzier horizon value is $695.5 million

Question 2:

FCF1 = -$21 million

FCF2 = $29 million

FCF3 = $52 million

Horizon value = $695.5 million

r = WACC = 15%

Value of firm today = [FCF1 / (1+r)^1] + [FCF2 / (1+r)^2] + [FCF3 / (1+r)^3] + [Horizon Value / (1+r)^3]

= [-$21 million / (1+15%)^1] + [$29 million / (1+15%)^2] + [$52 million / (1+15%)^3] + [$695.5 million / (1+15%)^3]

= [-$21 million / 1.15] + [$29 million / 1.3225] + [$52 million / 1.520875] + [$695.5 million / 1.520875]

= -$18.2608696 + $21.9281664 million + $34.1908441 million + $457.30254

= $495.160681 million

Therefore, value of firm today is $495.16 million

Question c:

Value of Firm = $495.16 million

Value of Debt = $189 million

Shares Outstanding = 5 million

Value of Equity = Value of firm - Value of Debt

= $496.16 million - $189 million

= $306.16 million

Current price per share = Value of equity / Shares Outstanding

= $306.16 million / 5 million

= $61.232 million

Therefore, current price per share is $61.23