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After the third year, FCF is expected to grow at 7% annually. The WACC is 12%....

After the third year, FCF is expected to grow at 7% annually. The WACC is 12%. $M Year 1 2 3 -30 70 90 1. What is Lincoln's Terminal Value? 2. What is the current value of operations? 3. Suppose Lincoln has $10M in marketable securities, $100M in liabilities, and 10M shares of stock. What is Lincoln's share price? 4. Assume Lincoln has European investors. The original spot rate was $1.1 per 1 Euro. If the spot rate were to change to $0.9 per 1 Euro, what would be the new stock price from the European perspective? Would they be more or less likely to buy Lincoln stock with the change in exchange rate (hint: there are two arguments to be made)?

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Expert Solution

(1) FCF1 = - $ 30 million, FCF2 = $ 70 million and FCF3 = $ 90 million, Post Year 3, the FCF grows at a perpetual constant rate of 7 % per annum. WACC = 12 %

FCF4 = FCF3 = 90 x 1.07 = $ 96.3 million

Terminal Value = FCF4 / (Wacc - Perpetual growth rate) = 96.3 / (0.12 - 0.07) = $ 1926 million

(2) Present Value of first three years' FCF = -30/(1.12) + 70 / (1.12)^(2) + 90 / (1.12)^(3) = $ 93.0781 million

Present Value of Terminal Value = 1926 / (1.12)^(3) = $ 1370.889

Current Value of Operations = 1370.889 + 93.078 = $ 1463.967 million ~ $ 1463.97 million

(3) Market value of Equity = Value of Operations + Marketable Securities - Liabilities = 1463.97 + 10 - 100 = $ 1373.97 million

Number of Shares Outstanding = 10 million

Price per Share = 1373.97 / 10 = $ 137.397 ~ $ 137.4

(4) Initial Exchange Rate = $ 1.1 / EUR, Initial Stock Price = 137.4 / 1.1 = 124.9091 EUR

New Exchange Rate = $ 0.9 / EUR, New Stock Price = 137.4 / 0.9 =152.6667 EUR

For the European Investor, the stock price becomes more expensive. In such a scenario the investor might feel that the stock is too expensive an investment and hence might pass it over for some other cheaper investment. However, the investor might expect the stock price to rise up further owing to the depreciating euro rate, thereby making the investor's EUR investment in Lincoln Profitable. In such a scenario, the change in exchange rate would influence the investor to go ahead with this investment.

jeff jeffy answered 1 year ago
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