Brandtly Industries invests a large sum of money in R&D; as a result, it retains
ID: 2614385 • Letter: B
Question
Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $6 million, $11 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 8%. Brandtly's WACC is 10%, the market value of its debt and preferred stock totals $68 million; and it has 17 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$
What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $6 million, $11 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 8%. Brandtly's WACC is 10%, the market value of its debt and preferred stock totals $68 million; and it has 17 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$
What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
Explanation / Answer
Present value(PV) of Cash flow=Cash flow/((1+i)^N) i=discount rate=WACC=10%=0.1, N= year of Cash Flow Free Cash Flow in year5= $16 million*1.08= $ 17,280,000 N Year 1 2 3 4 5 …… A Free Cash Flow $3,000,000 $6,000,000 $11,000,000 $16,000,000 SUM B=A/(1.1^N) Present Value(PV) of Free Cash Flows $ 2,727,273 $ 4,958,678 $ 8,264,463 $ 10,928,215 $ 26,878,629 C Cash flow in year 5 $ 17,280,000 …..Growing at 8% indefinitely D=$17.280 million/(0.1-0.08) Horizon or Continuing Value (at Year 4) $ 864,000,000 E=D/(1.1^N) Present Value(PV) of Horizon value $ 590,123,625 Present Value of future Free Cash Flows $ 617,002,253.94 (26878629+590123625) Present Value of Free Cash flow projected during nex four years= Sum of PV of Cash Flows in next four years Present Value of Free Cash flow projected during nex four years $ 26,878,629 Horizon or continuing Value $ 864,000,000 Total Value Today $ 617,002,253.94 Total Value of Equity shares=(Total Value today-Value of debt and preferred stock) Total value of Equity $ 549,002,254 (617002254-$68 million) Number of shares outstanding 13000000 estimate of Brandtly's price per share $ 42.23 (549002253.94/13000000)
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