Question

Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless stated otherwise. All bonds have a face value of $1000.

3. Lettuce Unite expects free cash flows of $10B next year, growing by 15% until year 2. After year 2, the growth rate falls to 4%. The cost of capital is 14%. They have $2B in cash and marketable securities and $25B in debt. There are 8B shares outstanding. Find the share price.

Answer 1

	WACC=	14.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	10		10	1.14	8.7719
2	10	15.00%	11.5	119.6	131.1	1.2996	100.87719
	Long term growth rate (given)=	4.00%			Value of Enterprise =	Sum of discounted value =	109.65 B

Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year
Unless FCF for the year provided
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 - Cash & Cash Equivalents 109.65 = Equity value+25-2 Equity value = 86.65 B share price = equity value/number of shares share price = 86.65/8 share price = 10.83