6. Corporate value model Aan Aa Ward Pharmaceuticals is expected to generate fre

Question

6. Corporate value model Aan Aa Ward Pharmaceuticals is expected to generate free cash flow (FCF) of $150 million this year (FCF1 $150 million), and FCF is expected to grow at a rate of 20% over the following two years (FCF2 and FCF3). After the third year, however, FCF is expected to grow at a constant rate of 5% per year, forever (FCF4). If Ward's weighted average cost of capital (WACC)is 11.3%, what is Ward's current total firm value? O $2,778 million $3,048 million O O $3,150 million $3,098 million O O $2,952 million Ward's debt has a market value of $1,800 million and Ward has no preferred stock. If Ward has 80 million shares of common stock outstanding, what is Ward's estimated intrinsic value per share of common stock? O $16.22 O $16.87 O $15.60 $12.22 O $14.99

Explanation / Answer

Answer:6 Ward's total current firm value is $3048 million.

Answer: Firm value =$3048

Less:Debt market value =$1800

Equity market value=$1248 million

Intrinsic value = equity market value/no of shares

=1248/80=$15.60

Period OFCF Calculation Amount P.V.F (11.3%) Present value 1 OFCF1 150 150 0.898 134.7 2 OFCF2 150*1.20 180 0.807 145.26 3 OFCF3 180*1.20 216 0.725294 156.6635 4 OFCF4… 216*1.05 226.8 0 226.8/(0.113-0.05) 3600 0.725294 2611.058 NPV 3047.682

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