Financial Corporation plans to acquire Great Western Inc and wants to know the fair value per...

Financial Corporation plans to acquire Great Western Inc and wants to know the fair value per share of the target firm. In the current year, the free cash flow to firm (FCFF) of Great Western Inc’ is $10 million. It is projected to grow at 20% per year for the next five years. After the first five years, it is expected to grow at a more modest 5% per year. The Financial Corporation estimates that the target firm’s cost of capital will be 12% during the next five years and then will drop to 10% after the fifth year. The target firm has 10 million common shares outstanding. In addition, the market value of the target firm’s outstanding debt is $200 million. Assume Great Western has no non-operating assets, non-operating liabilities, and cash. Show all your workings. Calculate the value of Great Western per common share.

Expert Solution

[Amounts in million $, except value per share]	0	1	2	3	4	5	6
FCF	$ 10.000000	$ 12.000000	$ 14.400000	$ 17.280000	$ 20.736000	$ 24.883200	$ 26.127360
Continuting value of FCF = 26.12736/(0.12-0.05) =						$ 373.248000
Total FCF		$ 12.000000	$ 14.400000	$ 17.280000	$ 20.736000	$ 398.131200
PVIF at 12%		0.89286	0.79719	0.71178	0.63552	0.56743
PV of FCF		$ 10.714286	$ 11.479592	$ 12.299563	$ 13.178103	$ 225.910335
Value of the operations	$ 273.581878
Less: Value of debt	$ 200.000000
Value of equity	$ 73.581878
Number of shares [in millions]	10.000000
Value per share	$ 7.36

jeff jeffy answered 1 year ago

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