A major pension fund is interested in purchasing Ted’s stock. The pension fund m

Question

A major pension fund is interested in purchasing Ted’s stock. The pension fund manager has estimated Ted’s free cash flows for the next 4 years as follows: $3 million, $6 million, $10 million, and $15 million. After the 4th year, free cash flow is projected to grow at a constant 7%.

Ted’s WACC (discount rate) is 12%, the market value of its debt and preferred stock totals $60 million, and it has 10 million shares of common stock outstanding.

What is Ted’s enterprise value today? (4 marks)

What is an estimate of Ted’s price per share? (2 marks)

Explanation / Answer

EV = value of common stock + value of preferred equity +value of debt + minority interest - cash and investments.

value of common stock = present value of future cash flows discounted at 12%

The terminal value after year 4 is
=15*(1+7%)/(12%-7%)
=$321 mn

=(3mn/1.12^1)+(6/1.12^2)+(10/1.12^3)+(15/1.12^4)+321/1.12^4

=$228,113,611.52

Enterprise value=228,113,611.52+60mn=$288,113,611.52

price per share=Enterprise value/ no of shares

=288,113,611.52/(10*10^6)

=28.81

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