Question

In: Accounting

Emma Limited’s current and forecasted free cash flows to the firm (FCFF) over the forecast horizon...

Emma Limited’s current and forecasted free cash flows to the firm (FCFF) over the forecast horizon and the terminal period are as follows ($ millions):

($ millions)

Current

Forecast Horizon

Terminal

Period

2020

2021

2022

2023

2024

2025

FCFF

1,697

1,799

1,907

2,021

2,051

2,082

Valuation assumptions and other information for Emma Limited are as follows:

Terminal growth rate	1.5%
Shares outstanding in millions	2,250
Net nonoperating obligations (NNO) ($ millions)	9,000
WACC	8.00%

REQUIRED:

Estimate Emma Limited’s equity value per share at the end of 2021 using the DCF model.

Solutions

Expert Solution

Let us calculate PV of FCF

FV = PV

i = WACC = 8%

The following excel sheet shows PV of FCF for 6 years

PV factor is , substituting this PV factor column of excel sheet

year	FCF ($)	PV factor	PV ($)
2020	1697	1.08	1571.296296
2021	1799	1.1664	1542.352538
2022	1907	1.259712	1513.838084
2023	2021	1.36048896	1485.495333
2024	2051	1.469328077	1395.876137
2025	2082	1.586874323	1312.013163

Total PVCF =

$ 8820.87155 million

FCFF witrh terminal growth rate in 2025 = 2082 x (1+1.5%) = 2082 x 1..015 = $2113.23 million

Terminal value in 2025 is 2113.23 / WACC - terminal growth rate = 2113.23 / 8% - 1.5% = 2113.23 / 6.5%

= $32,511.23 million

Discounting terminal value to its PV is 32511.23 / =

PV = 32511.23 / 1.5869 = $20,487.26 million

Total PVCF + PV of terminal valu is = $ 8820.87155 + $20,487.26 = $29,308.13 million

Net obligation or net debts = $ 9000 million

NET PVCF or intrinsic value of CF = $29,308.13 - $9000 =$20,308.13 million

Equity value per share of Emma limited = Intrinsic value of CF / no.of shares outstanding =

20,308.13 / 2250 = $9.026 per share

ekkarill92 answered 9 months ago

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