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 8% rate. Dantzler's WACC is 12%.

Year 0 1 2 3   

FCF ($ millions) - $14 $19 $39

A. 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.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.

$ million ?

B. What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.

$ million ?

C. Suppose Dantzler has $111 million of debt and 28 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent.

$ ?

Answer 1

Solution:

1.Calculation of Dantzler's horizon, or continuing value

Free cash flow for year 4=FCF for year 3*(1+growth rate)

= $39 million(1+.08)

=$42.12 million

Continuing value=FCF for year 4/(WACC-Growth rate)

=$42.12 million/(0.12-0.08)

=$1053 million

Thus,Dantzler's horizon or continuing value is $1053 millions

2.Calculation of firm's market value today

For calculating firm's market value today ,we have to discount the FCF and continuing value

firm's market value today is;

=FCF/(1+WACC)^n+ Continuing value/(1+WACC)^n

=$14/(1+.12)+$19/(1+.12)^2+$39/(1+.12)^3+$1053/(1+.12)^3

=$12.5+$15.147+$27.76+$750

=$805.41 millions

Thus,firm's market value today is $805.41 millions

3.Calculation of current price per share

Firm's market value=$805.41 millions

Market Value of debt=$111 million

Market Value of common stock=Firm's market value-Market Value of debt

=$805.41-$111

=$694.41 millions

No. of Shares=28 million

Thus,current price per share is;

=Market Value of common stock/No. of Shares

=$694.41/28

=$24.80

Thus, current price per share is $24.80