Question

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.

Answer 1

	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