Widget Inc. is expected to have the following free cash flows: Year 1 2 3 4...

Widget Inc. is expected to have the following free cash flows:

Year	1	2	3	4	5
FCF $Millions	22	27	32	36	38

After then, the free cash flows are expected to grow at the industry average of 5% per year. Using the discounted free cash flow model and the weighted average cost of capital of 10%:

a. Estimate Widget Inc. enterprise value

b. If Widget Inc. has 10 million in cash, 3 million in debt, and 10 million shares outstanding what is their estimated share price?

Solutions

Expert Solution

Following table shows the calculation of enterprise value:

Year	FCF $Millions	Discount factor			Discounted CF
1	22	1/1.10^1	=	0.909090909	22*0.909090909090909	=	20
2	27	1/1.10^2	=	0.826446281	27*0.826446280991735	=	22.31404959
3	32	1/1.10^3	=	0.751314801	32*0.751314800901578	=	24.04207363
4	36	1/1.10^4	=	0.683013455	36*0.683013455365071	=	24.58848439
5	38	1/1.10^5	=	0.620921323	38*0.620921323059155	=	23.59501028
5	798	1/1.10^5	=	0.620921323	798*0.620921323059155	=	495.4952158
					Enterprise Value= sum of all Discounted CF	=	610.0348337

As after year 5 the FCF are expected to grow at 5% for perpetuity, we need to calculate the terminal value using the following formula
We have calculated the enterprise value as $ 610.0348337 million
- Enterprise value = Market value of Equity+Market value of Debt - Cash and cash equivalents
- 610.0348337 million = Market value of Equity + 3 million -10 million
- Market value of Equity = 610.0348337 - 3 million -+10 million = 617.0348337 million
- Per share price = Market value of Equity / number of shares = 617.0348337 million/ 10 million = $61.70348337

jeff jeffy answered 8 months ago

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