Question

ji Fertilizer Corporation expects to generate following free cashflows in coming 5 years.

Year 1 2 3 4 5
FCF (Rs. Million) 51 70 77 72 80

After this time period, the free cashflows will grow constantly at 3% per year. The firm’s cost of capital is 13%. Using the discounted free cashflow model, calculate the following.

a. What is the enterprise value of Fauji Fertilizer Ltd? (2.5 marks)
b. If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? (2.5 marks)
c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not? (1 mark)

Answer 1

Value of the firm in year 5 = FCF year 5 * (1 + growth rate) / (Cost of Capital - growth rate)

Value of the firm in year 5 = Rs 80 * (1 + 3%) / (13% - 3%)

Value of the firm in year 5 = Rs 824 million

Enterprise value = FCF year 1 / (1 + Cost of Capital)¹ + FCF year 2 / (1 + Cost of Capital)² + FCF year 3 / (1 + Cost of Capital)³ + FCF year 4 / (1 + Cost of Capital)⁴ + FCF year 5 / (1 + Cost of Capital)⁵ + Value of the firm in year 5 / (1 + Cost of Capital)⁵

Enterprise value = 51 / (1 + 13%)¹ + 70 / (1 + 13%)² + 77 / (1 + 13%)³ + 72 / (1 + 13%)⁴ + 80 / (1 + 13%)⁵ + 824 / (1 + 13%)⁵

Enterprise value = Rs 688.1318042 million or Rs 688,131,804.2

Enterprise value = Value of Equity + Value of Debt - Cash

Rs 688,131,804.2 = Value of Equity + Rs 280,000,000 - Rs 32,000,000

Value of Equity = Rs 688,131,804.2 - Rs 280,000,000 + Rs 32,000,000

Value of Equity = Rs 440,131,804.2

Expected Share price = Value of Equity / Shares outstanding

Expected Share price = Rs 440,131,804.2 / 40,000,000

Expected Share price = Rs 11.00

c)

The market price of the stock in the market of Rs 12 is currently overvalued to the intrinsic value of the equity of Rs 11 . I would not buy the share at Rs 12.