Suppose that at June 15, 2018, as a staff financial analyst with Consulting Advi

Question

Suppose that at June 15, 2018, as a staff financial analyst with Consulting Advisory Services (CAS) you determine the following metrics for the upcoming 12-month period for Silva Corporation, Inc. (SCI):

After-tax operating income (aka, NOPAT) is forecast to be $400 million.

SCI’s depreciation expense is forecast at $140 million.

SCI’s capital expenditures (aka, CAPEX) is forecast to be $225 million.

No change is expected in SCI’s net operating working capital.

SCI’s free cash flow is forecast to grow at a constant rate of 6% per year.

You assess SCI’s required return on equity at 14% based on its operating and financial risks.

SCI’s WACC is 10%.

The market value of SCI’s debt is $3.875 billion.

SCI reports 200 million shares of common stock are outstanding.

TASK: Please -

Use the information above to estimate the “intrinsic value per share” (aka, estimated market price per share) of SCI’s common stock at June 15, 2018.

Explanation / Answer

Computation of Intrinsic Value per share:

Free Cash Flow = NOPAT + Depreciation - Capital Expenses

Free Cash Flow = $400 M + $140 M - $225 M

Free Cash Flow = $315 M

Value of Company = FCF * (1 + Growth Rate) / WACC - Growth Rate

Value of Company = $315M * (1 + 0.06) / 0.10 - 0.06

Value of Company = $333.9 M / 0.10 - 0.06

Value of Company = $8347.5 M

Value of Equity = Value of Company - Value of Debt

Value of Equity = $8.3475 B - 3.8750 B

Value of Equity = $4472.5 Million

Intrinsic Value per share = Value of Equity / Common Stock O/s

Intrinsic Value per share = $4472.5 M / 200 M

Intrinsic Value per share = $22.3625 per share

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