Question

Please calculate the per share value for Company A. Company A’s estimated Free Cash Flows for the next three years are as follows: Year 1 - $2,000; Year 2 - $2,500; and Year 3 - $3,000. After Year 3, Free Cash Flows are assumed to grow by 6% p.a. Company A’s discount rate is 10%. Company A has $10,000 of marketable securities, $20,000 of debt, and 1,000 shares outstanding.

Answer 1

Horizon value or Terminal Value

Cash flow in year 3 (CF3) = $3,000

Growth rate (g) = 6.00% per year

Required rate of return (Ke) = 10.00%

Therefore, the Horizon Value = CF3(1 + g) / (Ke - g)

= $3,000(1 + 0.06) / (0.10 – 0.06)

= $3,180 / 0.04

= $79,500

The Value of the firm

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

Year	Annual cash flow	Present Value Factor (PVF) at 10.00%	Present Value of cash flows [Cash flows x PVF]
1	2,000	0.9090909	1,818.18
2	2,500	0.8264463	2,066.12
3	3,000	0.7513148	2,253.94
3	79,500	0.7513148	59,729.53
TOTAL			65,867.77

The price of the share

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

= [$65,867.77 + $10,000 - $20,000] / 1,000 Shares outstanding

= $55,867.77 / 1,000 Shares outstanding

= $55.87 per share

Therefore, the per share value for Company A will be $55.87

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.