Question

In: Finance

At the end of its fiscal year 2019, an analyst made the following forecast for ABC,...

At the end of its fiscal year 2019, an analyst made the following forecast for ABC, Inc. (in millions of dollars):

	2020	2021	2022	2023
Cash flow from operation	$1,035	$3,180	$3,155	$2,120
Cash investment	425	480	445	820

ABC has a net debt of $823. Assume that free cash flow will grow at 4 percent per year after 2023. ABC had 300 million shares outstanding at the end of 2019, trading at $75 per share. Using a required return of 10 percent, calculate the following for ABC at the end of 2019 (You have to fill in the table below to show your working process):

The enterprise value

[5 marks]

Equity value

[2 marks]

Equity value per share

[2 marks]

Based on your estimate, should investors buy the share of this company?

[1 mark]

	2020	2021	2022	2023
Cash flow from operation
Cash investment
Free cash flow
Discount rate
PV of FCF
Total PV till 2025
Continuing value (CV)
PV of CV

Expert Solution

a]

EV = present value of next 4 years FCF + present value of CV at end of 2023

FCF = cash flow from operation - cash investment

CV = FCF in 2023 * (1 + growth rate after 2023) / (required return - growth rate after 2023)

present value = future value / (1 + required return)number of years

EV = $16,222 million

b]

Equity value = EV - debt

Equity value = $16,222 million - $823 million

Equity value = $15,399 million

c]

Equity value per share = Equity value / shares outstanding

Equity value per share = $15,399 million / 300 million

Equity value per share = $51.33

d]

No, investors should not buy because the market price of the share is higher than the equity value per share. The share is overvalued in the market.

jeff jeffy answered 1 year ago

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