Question

In: Finance

1. Suppose that a company has a Free Cash Flow of $150,000 in one year, $200,000...

1. Suppose that a company has a Free Cash Flow of $150,000 in one year, $200,000 in 2 years and then FCFs start growing at a constant rate of 5%. The WACC used as a discount rate for FCFs is 8%. The company has $ 18,000 in long-term debt and it has 40,000 shares outstanding. Find current stock price using FCF model.

2. Let's take a look at a different company. Free cash flows are usually volatile when a company is growing. Suppose that after 5 years of uneven growth FCF stabilizes and it is expected to be $50 million in Year 5. Its growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?

show all work. thanks

Solutions

Expert Solution

1

WACC= 8.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 150000 150000 1.08 138888.8889
2 150000 0.00% 200000 7000000 7200000 1.1664 6172839.506
Long term growth rate (given)= 5.00% Value of Enterprise = Sum of discounted value = 6311728.4
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 2 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor
Enterprise value = Equity value+ MV of debt
6311728.4 = Equity value+18000
Equity value = 6293728.4
share price = equity value/number of shares
share price = 6293728.4/40000
share price = 157.34

2

Horizon value= FCF year 5* (1 + growth rate )/(WACC - growth rate)
= 50 * (1+0.06) / (0.12 - 0.06)
= 883.33

jeff jeffy answered 2 years ago
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