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Years 1-5 Years 6-10 Residual Value After-tax cash flows $150,000 (each year) $200,000 (each year) $5,000,000...

Years 1-5 Years 6-10 Residual Value

After-tax cash flows $150,000 (each year) $200,000 (each year) $5,000,000

The above table depicts the consensus estimate of free cash flows for Paradise, Inc. What is the intrinsic per-share value of the firm given a required rate of return of 9% and 350,000 shares outstanding? (Assume that the year one through 10 cash flows are received at the end of the year and the residual value is received on January 1 of year 11).

a. $9.92 per share

b. $13.17 per share

c. $12.40 per share

d. $9.15 per share

Solutions

Expert Solution

Intrinsic Value per share

Present Value of future cash flows

Year

After-tax cash flows ($)

Present Value Factor at 9%

Present Value of After-tax cash flows ($)

1

1,50,000

0.917431

1,37,615

2

1,50,000

0.841680

1,26,252

3

1,50,000

0.772183

1,15,828

4

1,50,000

0.708425

1,06,264

5

1,50,000

0.649931

97,490

6

2,00,000

0.596267

1,19,253

7

2,00,000

0.547034

1,09,407

8

2,00,000

0.501866

1,00,373

9

2,00,000

0.460428

92,086

10

2,00,000

0.422411

84,482

10

50,00,000

0.422411

21,12,054

TOTAL

3,201,103

The intrinsic Value per share = Present Value of annual cash inflows / Number of common shares outstanding

= $3,201,103 / 350,000 Common shares outstanding

= $9.15 per share

“Hence, the Intrinsic Value per share will be (d). $9.15 per share”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.

jeff jeffy answered 1 year ago
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