Question

Acme Inc. is expected to generate a free cash flow (FCF) of $15,290.00 million this year (FCF₁ = $15,290.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Acme Inc.’s weighted average cost of capital (WACC) is 11.70%, what is the current total firm value of Acme Inc.? (Note: Round all intermediate calculations to two decimal places.) $329,391.22 million $46,149.03 million $364,384.41 million $274,492.68 million Acme Inc.’s debt has a market value of $205,870 million, and Acme Inc. has no preferred stock. If Acme Inc. has 150 million shares of common stock outstanding, what is Acme Inc.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.) $1,372.46 $457.48 $503.23 $456.48

Answer 1

The value of the firm is computed as shown below:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)2 + FCF3 / (1 + WACC)3 + 1 / (1 + WACC)3 [ ( FCF in year 3 (1 + growth rate) / (WACC - growth rate) ]

= $ 15,290 million / 1.1170 + ($ 15,290 million x 1.25) / 1.11702 + ($ 15,290 million x 1.252) / 1.11703 + 1 / 1.11703 x [ ( $ 15,290 million x 1.252 x 1.039) / (0.1170 - 0.039) ]

= $ 15,290 million / 1.1170 + $ 19,112.5 million / 1.11702 + $ 23,890.625 million / 1.11703 + 1 / 1.11703 x [ ($ 318,235.3766 million) ]

= $ 15,290 million / 1.1170 + $ 19,112.5 million / 1.11702 + $ 342,126.0016 million / 1.11703

= $ 274,492.6773 million or $ 274,492.68 million Approximately

The per share value is computed as shown below:

= ($ 274,492.6773 million - value of debt) / Number of shares

= ($ 274,492.6773 million - $ 205,870 million) / 150 million shares

= $ 457.48 Approximately

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