In: Finance
13.
Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dantzler's WACC is 12%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $13 | $31 | $39 |
(a)-Dantler’s Horizon or Continuing Value
Free cash flow in year 3 (FCF3) = $39 Million
Growth Rate (g) = 7% per year
Weighted Average Cost of capital (WACC) = 12%
Therefore, the Horizon Value = FCF3(1 + g) / (WACC – g)
= $39 (1 + 0.07) / (0.12 – 0.07)
= $41.73 / 0.05
= $834.60
“Dantler’s Horizon or Continuing Value = $834.60”
(b)-Firm’s Value Today
Firm’s Value Today = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + HV/(1+r)3
= [-$13 / (1 + 0.12)1] + [$31 / (1 + 0.12)2] + [$39 / (1 + 0.12)3] + [$834.60 / (1 + 0.12)3]
= [-$13 / 1.12] + [$31 / 1.25440] + [$39 / 1.40493] + [$834.60 / 1.40493]
= -$11.61 + $24.71 + $27.76 + $594.05
= $634.94 Million
“Firm’s Value Today = $634.94 Million”
(c)-Current Price per share
Current Price per share = [Firms Value – Debt Outstanding] / Number of stocks outstanding
= [$634.94 Million - $172 Million] / 17 Million shares
= $462.92 Million / 17 Million shares
= $27.23 per share
“Current Price per share = $27.23 per share”