In: Finance
Your company is evaluating a
purchase of Skeksis Crystal Mining LLC. Skekis produced
free cash flow of $7.3m last year, and this is expected to grow at 11% for the next five
years before leveling off to a long term growth rate of 2%. Your company has a cost of
capital of 10%, while Sk
eksis has a cost of capital of 13%. Skeksis has 3 million shares
outstanding and $25m in debt. What would be the highest price you would pay per share
of Skeksis’ stock?
WACC= | 13.00% | ||||||
Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 7.3 | 11.00% | 8.103 | 8.103 | 1.13 | 7.1708 | |
2 | 8.103 | 11.00% | 8.99433 | 8.99433 | 1.2769 | 7.04388 | |
3 | 8.99433 | 11.00% | 9.9837063 | 9.9837063 | 1.442897 | 6.91921 | |
4 | 9.9837063 | 11.00% | 11.08191399 | 11.08191399 | 1.63047361 | 6.80 | |
5 | 11.08191399 | 11.00% | 12.30092453 | 114.063 | 126.3639245 | 1.842435179 | 68.59 |
Long term growth rate (given)= | 2.00% | Value of Enterprise = | Sum of discounted value = | 96.52 |
Where | |||
Current FCF =Previous year FCF*(1+growth rate)^corresponding year | |||
Total value = FCF + horizon value (only for last year) | |||
Horizon value = FCF current year 5 *(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 |
96.52 = Equity value+25 |
Equity value = 71.52 |
share price = equity value/number of shares |
share price = 71.52/3 |
share price = 23.84 |