Question

Dozier 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 5% rate. Dozier's weighted average cost of capital is WACC = 18%. Year 1 2 3 Free cash flow ($ millions) -$20 $30 $40 What is Dozier's terminal, or horizon, 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. $ 323.08 million What is the current value of operations for Dozier? Round your answer to two decimal places. Round intermediate calculations to two decimal places. $ million Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Round your answer to the nearest cent. Round intermediate calculations to two decimal places.

Answer 1

(a)-Dozier's horizon value

Free cash flow in year 3 (FCF3) = $40 Million

Growth Rate (g) = 5.00% per year

Weighted Average Cost of capital (WACC) = 18.00%

Therefore, the Horizon Value = FCF3(1 + g) / (WACC – g)

= $40 Million(1 + 0.05) / (0.18 – 0.05)

= $42.00 Million / 0.13

= $323.08 00Million

(b)-The current value of operations for Dozier

Firms Value Today is the Present Value of the Free Cash flows and the Terminal Value

Year	Cash flow ($ in Million)	Present Value Factor (PVF) at 18.00%	Present Value of cash flows ($ in Million) [Cash flows x PVF]
1	(20.00)	0.8474576	(16.95)
2	30.00	0.7181844	21.55
3	40.00	0.6086309	24.35
3	323.08	0.6086309	196.63
TOTAL	225.58

“Hence, the current value of operations for Dozier is $225.58 Million”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.

(c)-Intrinsic price per share

Intrinsic price per share = [Value of operation + Marketable securities – Debt] / Number of stocks outstanding

= [$225.58 Million + $10 Million - $100 Million] / 10 Million Shares outstanding

= $135.58 Million / 10 Million Shares outstanding

= $13.56