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DC is a fast-growing company supplying office products. The following FCFs are projected during the next...

DC is a fast-growing company supplying office products. The following FCFs are projected during the next three years, after which the FCF is expected to grow at a constant 8 percent rate. The required WACC is 12 percent.

Year 1 2 3
FCF (R million) 30 40 50

Required:
8.1. Calculate DC’s terminal, or horizontal, value.
8.2. Calculate the current value of operations for DC.
8.3. Assuming that DC has R10 million in marketable securities, R100 million in debt, and 10 million shares. Calculate the intrinsic price per share.

Solutions

Expert Solution

WACC= 12.00%
Year Previous year FCF FCF growth rate FCF current year 8.1 Horizon value Total Value Discount factor Discounted value
1 0 0.00% 30 30 1.12 26.7857
2 30 0.00% 40 40 1.2544 31.88776
3 40 0.00% 50 1350 1400 1.404928 996.49235
Long term growth rate (given)= 8.00% 8.2 Value of Enterprise = Sum of discounted value = 1055.17
Where
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

8.3

Enterprise value = Equity value+ MV of debt
- Short term investments
1055.17 = Equity value+100-10
Equity value = 965.17
share price = equity value/number of shares
share price = 965.17/10
share price = 96.52

jeff jeffy answered 1 year ago
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