Question

Free cash flow valuation   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

$2,480,000

of debt at market value and

$500,000

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,

Year ​(t​)	Free cash flow ​(FCF​)
2016	​$250,000
2017	​$300,000
2018	​$370,000
2019	​$440,000
2020	​$520,000

. Beyond 2020 to​ infinity, the firm expects its free cash flow to grow by

5 %

annually.

a.  Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation

model.

a.  The value of Nabor​ Industries' entire company is

​$ 4,969,043 nothing

b.  Use your finding in part

a​,

along with the data provided​ above, to find Nabor​ Industries' common stock value.

b.  The value of Nabor​ Industries' common stock is

​$ ? nothing.

​(Round to the nearest​ dollar.)

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%	250000		250000	1.13	221238.9381
2	250000	0.00%	300000		300000	1.2769	234944.005
3	300000	0.00%	370000		370000	1.442897	256428.56
4	370000	0.00%	440000		440000	1.63047361	269860.2402
5	440000	0.00%	520000	6825000	7345000	1.842435179	3986571.73
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	4969043.47

Where
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.

Enterprise value = Equity value+ MV of debt+ MV of preferred stock

4969043.47 = Equity value+2480000+500000

Equity value = 1989043.47