In: Finance
Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 5% rate. Dantzler's WACC is 15%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $25 | $17 | $38 |
(a)-Dantzler's horizon, or continuing, value
Free cash flow in year 3 (FCF3) = $38 Million
Growth Rate (g) = 5% per year
Weighted Average Cost of capital (WACC) = 15%
Therefore, the Horizon Value = FCF3(1 + g) / (WACC – g)
= $38 Million(1 + 0.05) / (0.15 – 0.05)
= $39.90 Million / 0.10
= $399.00 Million
(b)-Firm’s Value Today
Firm’s Value Today = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + HV/(1+r)3
= [-$25 Million / (1 + 0.15)1] + [$17 Million / (1 + 0.15)2] + [$38 Million / (1 + 0.15)3] + [$399.00 Million / (1 + 0.15)3]
= [-$25 Million / 1.15] + [$17 Million / 1.32250] + [$38 Million / 1.52088] + [$399.00 Million / 1.52088]
= -$21.74 Million + $12.85 Million + $24.99 Million + $262.35 Million
= $278.45 Million
(c)-Current Price per share
Current Price per share = [Firms Value – Debt Outstanding] / Number of stocks outstanding
= [$278.45 Million - $112.70 Million] / 10 Million shares
= $165.75 Million / 10 Million shares
= $16.57 per share