In: Finance
CORPORATE VALUATION
Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $2 million, $5 million, $9 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 3%. Brandtly's WACC is 12%, the market value of its debt and preferred stock totals $62 million; and it has 14 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
a). Calculating the present value of the free cash flows projected during the next 4 years :-
Present Value of free Cash Flow = 1.7857 + 3.9860 + 6.4060 + 10.1683
Present Value of Free Cash Flow = = $ 22.35 millions
b). Calculating firm's horizon value:-
So, Firm's Horizon value is $ 183.11 millions
c). Firm's Total Value Today = Present Value of free Cash Flow projected during the next 4 years + Horizon Value/(1+WACC)^4
= $ 22.35 + $183.11/(1+0.12)^4
= $ 22.35 + $ 116.37
= $ 138.72 millions
d). Value of Firm today = Equity Value + Market value of Debt & Preferred Stock
$138.72 millions = Equity Value + $62 million
Equity Value= $ 76.72 million
No of shares outstanding = 14 million
Price per share = Equity Value/No of shares outstanding
= $ 76.72 million/$14 million
= $ 5.48 per share
So, the estimate of Brandtly's price per share is $ 5.48
If you need any clarification, you can ask in comments.
If you like my answer, then please up-vote as it will be motivating