In: Accounting
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.
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