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

	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

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

= 50 * (1+0.06) / (0.12 - 0.06)

= 883.33

jeff jeffy answered 1 year ago

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