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Suppose you can estimate the free cash flow for Hoosier Electronics for the next 3 years....

Suppose you can estimate the free cash flow for Hoosier Electronics for the next 3 years. You predict that FCF will be $65.00, $53.00, and $58.00 million respectively. After the third year, you believe that FCF’s will grow forever at 5.00%. The firm’s WACC is 11.00%. Currently, the book value of bonds is $203.00 million, the book value of notes payable is $61.00 million, and the book value of preferred stock is $36.00 million. If the firm has 27.00 million shares of common stock outstanding, what is the equity value per share.

Solutions

Expert Solution

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% 65 65 1.11 58.55855856
2 65 0.00% 53 53 1.2321 43.01598896
3 53 0.00% 58 1015 1073 1.367631 784.5683521
Long term growth rate (given)= 5.00% Value of Enterprise = Sum of discounted value = 886.14
Where
Current FCF = Previous year FCF*(1+growth rate)^corresponding year
Unless FCF for the year provided
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor= (1+ WACC)^corresponding period
Discounted value= total value/discount factor

equity per share = (enterprise value - value of bonds-value of notes-value of preferred equity)/share outstanding

=(886.14-203-61-36)/27=21.71

jeff jeffy answered 1 year ago
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