Ward Pharmaceuticals is expected to generate free cash flow (FCF) of $150 millio

Question

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).

1) If Ward's weighted average cost of capital (WACC) is 10.9%, what is Ward's current total firm value?

2) 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?

Explanation / Answer

1)total firm value = $150/1.109 +($150*1.2)/1.109^2 + ($150*1.2^2)/1.109^3 +((($150*1.2^2)*1.05)/(10.9%-5%))/(1.109^3) =3258.337 million 2) Equity = 3258.337147-1800 = $1458.337 million Value per share= 1458.337147/80 =$18.229

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