Question

Problem 9-15
Corporate valuation

Dozier 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 4% rate. Dozier's WACC is 10%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
FCF ($ millions)	.......	.......	.......	.......	.......	.......	.......	......
	NA		- 21		28		54

1. What is Dozier's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.
   $   million
   
2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.
   $   million
   
3. Suppose Dozier has $89 million of debt and 34 million shares of stock outstanding. What is your estimate of the price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.
   $  

Answer 1

(a)-Dozier’s horizon, or continuing, value

Free cash flow in year 3 (FCF3) = $54 Million

Growth Rate (g) = 4.00% per year

Weighted Average Cost of capital (WACC) = 10.00%

Therefore, the Horizon Value = FCF3(1 + g) / (WACC – g)

= $54 Million(1 + 0.04) / (0.10 – 0.04)

= $56.16 Million / 0.06

= $936.00 Million

(b)-Firm’s Value Today

Firms Value Today is the Present Value of the Free Cash flows and the Terminal Value

Year	Cash flow ($ in Million)	Present Value Factor (PVF) at 10.00%	Present Value of cash flows ($ in Million) [Cash flows x PVF]
1	-21.00	0.909091	-19.09
2	28.00	0.826446	23.14
3	54.00	0.751315	40.57
3	936.00	0.751315	703.23
TOTAL			747.85

“Hence, the firm's value today will be $747.85 Million”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

(c)-Current Price per share

Current Price per share = [Firms Value – Debt Outstanding] / Number of stocks outstanding

= [$747.85 Million - $89.00 Million] / 34 Million Shares outstanding

= $658.85 Million / 34 Million Shares outstanding

= $19.38 per share