Question

Itab Shop Concept AB is expected to generate the following free cash flows over the next five years:

Year	1	2	3	4	5
FCF ($ million)	53	68	78	75	82

After year 5, the free cash flows are expected to grow at the industry average of 3.0% per year. Using the discounted free cash flow model and assuming a cost of capital of 9.5%,

a. Estimate the enterprise value of Itab Shop Concept.

Itab's enterprise value is $ million. (round to the nearest million).

b. If Itab Shop Concept has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate Itab's share price.

Itab's equity value is $ million. (round to the nearest million)

Itab's stock price is $. (in dollar, round to two decimals)

Answer 1

(a)- Enterprise value of Itab Shop Concept

Enterprise value is the aggregate value of the Present Value of the Free Cash Flows plus the Present Value of Terminal Value

Terminal Value (TV) = CF5(1 + g) / (Ke – g)

= $82 Million(1 + 0.03) / (0.095 – 0.03)

= $84.46 Million / 0.065

= $1,299.38 Million

Year	Free Cash Flow ($ in Million)	Present Value factor at 9.50%	Present Value of Free Cash Flow ($ in Million)
1	53.00	0.91324	48.40
2	68.00	0.83401	56.71
3	78.00	0.76165	59.41
4	75.00	0.69557	52.17
5	82.00	0.63523	52.09
5	1,299.38	0.63523	825.41
TOTAL			1,094.19

“Therefore, the Enterprise value of Itab Shop Concept = $1,094 Million”

(b)- Itab's equity value & Itab's stock price

Itab's equity value

Itab's equity value = Enterprises Value – Debts Outstanding

= $1,094 Million - $300 Million

= $794 Million

Itab's stock price

Itab's stock price = Equity Value / Number of shares outstanding

= $794 Million / 40 Million shares outstanding

= $19.85 per shares