Problem Walk-Through ORPORATE VALUATION Industries invests a large sum of money
ID: 2618911 • Letter: P
Question
Problem Walk-Through ORPORATE VALUATION 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 randty 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, SS milion, S8 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Branety's WACC is 16%, the market value of its debt and preferred stock totals $64 milion; 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. a. 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 b. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent. C. What is the firms total value today? Round your answer to the nearest cent. Do not round your intermediate calculations. d. What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calcuilations 4?Explanation / Answer
Answer a.
FCF1 = $3,000,000
FCF2 = $5,000,000
FCF3 = $8,000,000
FCF4 = $15,000,000
WACC = 16%
Present Value of FCF of next 4 years = $3,000,000/1.16 + $5,000,000/1.16^2 + $8,000,000/1.16^3 + $15,000,000/1.16^4
Present Value of FCF of next 4 years = $19,711,649.26
Answer b.
Constant growth rate, g = 6%
FCF5 = FCF4 * (1 + g)
FCF5 = $15,000,000 * 1.06
FCF5 = $15,900,000
Horizon Value = FCF5 / (WACC - g)
Horizon Value = $15,900,000 / (0.16 - 0.06)
Horizon Value = $159,000,000
Answer c.
Present Value of Horizon Value = $159,000,000 / 1.16^4
Present Value of Horizon Value = $87,814,284.56
Firm’s Total Value = Present Value of FCF of next 4 years + Present Value of Horizon Value +
Firm’s Total Value = $19,711,649.26 + $87,814,284.56
Firm’s Total Value = $107,525,933.82
Answer d.
Value of Common Stock = Firm’s Total Value - Value of Debt + Value of Preferred Stock
Value of Common Stock = $107,525,933.82 - $64,000,000
Value of Common Stock = $43,525,933.82
Price per share = Value of Common Stock / Number of shares outstanding
Price per share = $43,525,933.82 / 17,000,000
Price per share = $2.56
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