Question

Financial Management

Please show formula and get the calculation in detail.

Russell Industries retains all of its earnings and does not pay a dividend. A major hedge fund is interested in buying Russell’s stock. The hedge fund manager estimates the free cash flow over the next 4 years will be $3mm, $6mm, $10mm, and $12mm. After the 4^th year, the free cash flow is expected to grow at 5%. Russell’s WACC is 12%, its debt is $40mm, and it has 10 million shares of common stock. What is the firm’s market value? What is the Terminal value? What is the stock price per share?

Answer 1

	0	1	2	3	4
FCF		$    30,00,000	$    60,00,000	$ 1,00,00,000	$   1,20,00,000
PVIF at 12% [PVIF = 1/1.12^t]		0.89286	0.79719	0.71178	0.63552
PV at 12% [FCF*PVIF]		$    26,78,571	$    47,83,163	$    71,17,802	$      76,26,217
Sum of PV of FCF, years 1 to 4	$   2,22,05,754
Terminal value = 12000000*1.05/(0.12-0.05) =					$18,00,00,000
PV of terminal value = 180000000*0.63552 =	$ 11,43,93,600
Firm's market value	$ 13,65,99,354
Less: Debt	$   4,00,00,000
Value of equity	$   9,65,99,354
Number of shares	10000000
Stock price per share	$                 9.66