Question

1. Suppose that you are analyzing a stock to determine its intrinsic value. You went to the company's website to find an announcement about an expansion plan. The announcement states that the management has decided to borrow $25 million that costs 5% (the WACC) to fund the expansion. The management projects that the expansion will generate the following free cash flows for the next 3 years -$2 million, $8 million, and $15 million. After Year 3, free cash flow is projected to grow at a constant 3%.

A. What is the firm's market value (total value)?

B. If the firm has $20 million of debt, what is the market value (MV) of equity?

C. If the firm has 5 million shares of stock, what is the value (price) per share?

Answer 1

A)
	Free Cash Flow		Amt. in $ million
	Year	FCF	DF@5%	PV of FCF
	1	-2	0.95238095	-1.90
	2	8	0.90702948	7.26
	3	15	0.8638376	12.96
	4	15.45	0.82270247	12.71
	4	772.5	0.82270247	635.54
		Value of the firm	666.56
	TV = FCF (1+g)/(WACC - g), where g = constant growth rate
	=15.45/(0.05-0.03)
	772.5
	This will be discounted with discounting factor multiple of year 4
	Market value of the firm is $666.56 million
B)	If the firm has debt of $ 20 million, MV of equity = $646.56 million (666.56 - 20)
C)	If the firm has 5 million shares, value per share =
	=666.56/ 5
	133.312
	Value per equity share = $133.312
	Note : It is assumed that question B and C are independent of each other