Question

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public​offering, managers at Nabor have decided to make their own estimate of the​ firm's common stock value. The​ firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.

The​ firm's weighted average cost of capital is

11 %11%​,

and it has

$ 3 comma 360 comma 000$3,360,000

of debt at market value and

$ 670 comma 000$670,000

of preferred stock in terms of market value. The estimated free cash flows over the next 5​years,

20202020

through

20242024​,

are given in the​ table,

LOADING...

. Beyond

20242024

to​ infinity, the firm expects its free cash flow to grow by

5 %5%

annually.

a.  Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation

model.

b.  Use your finding in part

a​,

along with the data provided​ above, to find Nabor​ Industries' common stock value.

c.  If the firm plans to issue

200 comma 000200,000

shares of common​ stock, what is its estimated value per​ share?

Year ​(t​)	Free cash flow ​(FCF​)
20202020	​$280 comma 000280,000
20212021	​$330 comma 000330,000
20222022	​$410 comma 000410,000
20232023	​$460 comma 000460,000
20242024	​$510 comma 000

Answer 1

a.

	WACC=	11.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	280000		280000	1.11	252252.2523
2	280000	0.00%	330000		330000	1.232	267857.1429
3	330000	0.00%	410000		410000	1.368	299707.6023
4	410000	0.00%	460000		460000	1.518	303030.303
5	460000	0.00%	510000	8925000	9435000	1.685	5599406.528
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	6722253.83

Where

Total value = FCF	+ horizon value (only for last year)
Horizon value =	FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=	(1+ WACC)^corresponding period
Discounted value=	total value/discount factor

b.

Enterprise value = Equity value+ MV of debt+ MV of preferred stock

6722253.83 = Equity value+3360000+670000

Equity value = 2692253.83

c.

share price = equity value/number of shares

share price = 2692253.83/200000

share price = 13.46