Question

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: $4 million, $7 million, $8 million, and $13 million. After the fourth year, free cash flow is projected to grow at a constant 8%. Brandtly's WACC is 9%, the market value of its debt and preferred stock totals $66 million; and it has 20 million shares of common stock outstanding.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.
   
   $ 24948480.31
2. 
   
3. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
   
   $ 1404000000
4. 
   
5. What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.
   
   $ ?

Answer 1

(a)-The present value of the free cash flows projected during the next 4 years

Year	Cash flow ($)	Present Value factor at 9%	Present Value of cash flows ($ in Millions)
1	40,00,000	0.91743119	3,669,724.77
2	70,00,000	0.84167999	5,891,759.95
3	80,00,000	0.77218348	6,177,467.84
4	1,30,00,000	0.70842521	9,209,527.74
TOTAL			24,948,480.31

“The present value of the free cash flows projected during the next 4 years would be $24,948,480.31”

(b)-The firm’s horizon, or continuing, value

Growth Rate after 4 years (g) = 8% per year

Weighted Average Cost of Capital (WACC) = 9%

Firm’s horizon, or continuing, value = FCF4(1 + g) / (WACC – g)

= $130,00,000(1 + 0.08) / (0.09 – 0.08)

= $14,040,000 / 0.01

= $1,404,000,000

“The firm’s horizon, or continuing, value = $1,404,000,000”

(c)-The firm’s total value today

Present Value of firm’s horizon, or continuing, value

Present Value of firm’s horizon, or continuing, value = Horizon, or continuing, value x (PVIF 9%, 4 Years)

= $1,404,000,000 x 0.70842521

= $994,628,996.33

The firm’s total value today = Present value of the free cash flows projected during the next 4 years + Present Value of firm’s horizon, or continuing, value

= $24,948,480.31 + $994,628,996.33

= $1,019,577,476.64

“The firm’s total value today = $1,019,577,476.64”

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.