Free cash flow valuation Nabor Industries is considering going public but is uns

Question

Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2013 through 2017, are given below. Beyond 2017 to infinity, the firm expects its free cash flow to grow by 3% annually.

Year Estimated Free Cash Flows
2013 200,000
2014 250,000
2015 300,000
2016 310,000
2017 350,000

a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?

Explanation / Answer

a)Since beyond 2017 cash flow will grow @ 3% for infinite period

Cash flow of 2018 = cash flow of 2017* (1+.03)

                                      = 350000*1.03 = 360500

present value of infinite cash flow at the end of 2017 = next year cash flow(2018) /[WACC- Growth]

                                                                        = 360500/[.11-.03]

                                                                     = 360500/.08

                                                                      = $ 4,506,250

So value of company using FCF model = $ 3,688,821.38

b)Value of common stock =Value of overall firm - Value of debt -value of preferred stock

                                    3688821.38 - 1500000- 400000

                                     =$ 1,788,821.38

c)Estimated value per share = Value of common stock /Number of common stock shares

                                          = 1788821.38/ 200000

                                         = $ 8.944 per share

year FCF Cash flow of infinite period present value @11% present value of cash flows 2013 200000 - .9009 180180 2014 250000 - .8116 202900 2015 300000 - .7312 219360 2016 310000 - .6587 204197 2017 350000 4506250 .5935 2882184.38 Total 3,688,821.38

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.