Question

Dantzler 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 7% rate. Dantzler's WACC is 11%. Year 0 1 2 3 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ...... FCF ($ millions) - $23 $17 $46 What is Dantzler'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 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. Do not round your intermediate calculations. $ million Suppose Dantzler has $127 million of debt and 26 million shares of stock outstanding. What is your estimate of the current 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)-Dantler’s Horizon or Continuing Value (HV)

Growth Rate (g) = 7% per year

Weighted Average Cost of Capital (WACC) = 11%

Horizon Value = CF3(1 + g) / (WACC – g)

= $46 Million(1 + 0.07) / (0.11 – 0.07)

= $49.22 Million / 0.04

= $1,230.50 Million

“Dantler’s Horizon or Continuing Value = $1,230.50 Million”

(b)-Firm’s Value Today

The Value of the firm today is the present value of the Future cash flows plus the Present Value of the Horizon or Continuing Value

Firm’s Value Today = CF1/(1+r)¹ + CF2/(1+r)² + CF3/(1+r)³ + HV/(1+r)³

= [-$23 / (1 + 0.11)¹] + [$17 / (1 + 0.11)²] + [$46 / (1 + 0.11)³] + [$1,230.50 / (1 + 0.11)³]

= [-$23 / 1.11] + [$17 / 1.23210] + [$46 / 1.36763] + [$1,230.50 / 1.3676]

= -$20.72 + $$13.80 + $33.63 + $899.73

= $926.44 Million

“Firm’s Value Today = $926.44 Million “

(c)-Current Price per share

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

= [$926.44 Million - $127 Million] / 26 Million common shares outstanding

= $799.44 Million / 26 Million common shares outstanding

= $30.75 per share

“Current Price per share = $30.75 per share”