Question

Free cash flow valuation   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

13 %

and it has

$2,480,000

of debt at market value and

$500,000

of preferred stock at its assumed market value. The estimated free cash flows over the next 5​ years, 2016 through​2020, are given in the​ table,

Year ​(t​)	Free cash flow ​(FCF​)
2016	​$250,000
2017	​$300,000
2018	​$370,000
2019	​$440,000
2020	​$520,000

. Beyond 2020 to​ infinity, the firm expects its free cash flow to grow by

5 %

annually.

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

model.

a.  The value of Nabor​ Industries' entire company is

​$ ? nothing.​(Round to the nearest​ dollar.)

Answer 1

Year	Cash Flow	Cash Flow	PV factor	Present Values
1		250,000	0.884956	221,238.94
2		300,000	0.783147	234,944.01
3		370,000	0.69305	256,428.56
4		440,000	0.613319	269,860.24
5		520,000	0.54276	282,235.17
5		6,825,000	0.54276	3,704,336.56
			Total PV	4,969,043
Current Cash Flow	520,000
Rate of return	13.00%
Growth Rate	5.00%
Horizon value	=Current Cash Flow*(1+Growth rate)/(Rate of return-Growth Rate)
	'520000*(1+5%)/(13%-5%)
	6,825,000
Value of Firm	4,969,043
Debt value	2,480,000
Preferred Stock	500,000
Value of equity	1,989,043