Question

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the​ firm's common stock value. The​ firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The​ firm's weighted average cost of capital is 13%, and it has $2,190,000 of debt at market value and $440,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5​ years, 2016 through​ 2020, are given in the​ table, Beyond 2020 to​ infinity, the firm expects its free cash flow to grow by 3% annually.

2016	​$290,000
2017	​$350,000
2018	​$430,000
2019	​$500,000
2020	​$530,000

a. Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part along with the data provided​ above, to find Nabor​ Industries' common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per​ share?

Answer 1

a.

	WACC=	13.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	290000		290000	1.13	256637.1681
2	290000	0.00%	350000		350000	1.277	274079.8747
3	350000	0.00%	430000		430000	1.443	297990.298
4	430000	0.00%	500000		500000	1.63	306748.4663
5	500000	0.00%	530000	5459000	5989000	1.842	3251357.22
	Long term growth rate (given)=	3.00%			Value of Enterprise =	Sum of discounted value =	4386813.03

Where
Current FCF =	Previous year FCF*(1+growth rate)^corresponding year
Unless FCF for the year provided
Total value = FCF	+ horizon value (only for last year)
Horizon value =	FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=	(1+ WACC)^corresponding period
Discounted value=	total value/discount factor

b.

Equity value = enterprise value - MV of debt-MV of preferred stock = 4386813.03-2190000-440000=17568153.03

c.

stock price = equity value/shares issued = 17568153.03/200000=87.84