Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years.

Year	1	2	3	4	5
FCF​ ($ million)	53.2	68.1	79.3	74.3	83.5

​Thereafter, the free cash flows are expected to grow at the industry average of

4.4%

per year. Use the discounted free cash flow model and a WACC of

13.8%

to estimate the following.

a. The enterprise value of Heavy Metal

b. Heavy​ Metal's share price if the company has no excess​ cash, debt of $289​million, and39 million shares outstanding

Answer 1

The value is computed as shown below:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)² + FCF3 / (1 + WACC)³ + FCF4 / (1 + WACC)⁴ + FCF5 / (1 + WACC)⁵ + 1 / (1 + WACC)⁵ [ ( FCF in year 5 (1 + growth rate) / (WACC - growth rate) ]

= $ 53.2 million / 1.138 + $ 68.1 million / 1.138² + $ 79.3 million / 1.138³ + $ 74.3 million / 1.138⁴ + $ 83.5 million / 1.138⁵ + 1 / 1.138⁵ [ ( $ 83.5 million x 1.044) / ( 0.138 - 0.044) ]

= $ 53.2 million / 1.138 + $ 68.1 million / 1.138² + $ 79.3 million / 1.138³ + $ 74.3 million / 1.138⁴ + $ 83.5 million / 1.138⁵ + $ 927.3829787 million / 1.138⁵

= $ 53.2 million / 1.138 + $ 68.1 million / 1.138² + $ 79.3 million / 1.138³ + $ 74.3 million / 1.138⁴ + $ 1,010.882979 million / 1.138⁵

= $ 727.0940766 million

So, the value per share will be computed as follows:

= ($ 727.0940766 million + cash - debt) / Number of shares

= ($ 727.0940766 million + 0 - $ 289 million) / 39 million shares

= $ 11.23 Approximately

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