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Ladwig Incorporated is considering whether to acquire Shocker Enterprises (SE). Estimate the per-share value of SE...
Ladwig Incorporated is considering whether to acquire Shocker Enterprises (SE). Estimate the per-share value of SE using a discounted FCF approach and the following data: • Debt: $75 million
• Excess cash: $10 million
• Shares outstanding: 40 million
• Expected FCF: $20 million in each of the next five years, growing after that by 4 percent per year for the foreseeable future
• Weighted average cost of capital: 15 percent
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Expert Solution
| WACC= | 15.00% | ||||||
| Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 0.00% | 20 | 20 | 1.15 | 17.3913 | |
| 2 | 20 | 0.00% | 20 | 20 | 1.3225 | 15.12287 | |
| 3 | 20 | 0.00% | 20 | 20 | 1.520875 | 13.15032 | |
| 4 | 20 | 0.00% | 20 | 20 | 1.74900625 | 11.43506 | |
| 5 | 20 | 0.00% | 20 | 189.091 | 209.091 | 2.011357188 | 103.95518 |
| Long term growth rate (given)= | 4.00% | Value of Enterprise = | Sum of discounted value = | 161.05 |
| Where | |||
| Total value = FCF + horizon value (only for last year) | |||
| Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate) | |||
| Discount factor=(1+ WACC)^corresponding period | |||
| Discounted value=total value/discount factor | |||
| Enterprise value = Equity value+ MV of debt |
| - Cash & Cash Equivalents |
| 161.05 = Equity value+75-10 |
| Equity value = 96.05 |
| share price = equity value/number of shares |
| share price = 96.05/40 |
| share price = 2.4 |
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