Question

In: Finance

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

  1. 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 1 year ago
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