The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of deb

Question

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, 2016 through 2020, are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually. Year (t) Free cash flow (FCFt) 2016 $200,000 2017 250,000 2018 310,000 2019 350,000 2020 390,000 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? STEP BY STEP ANSWER

Explanation / Answer

a: the value of Nabor Industries’ entire company by using the free cash flow valuation model :

390000+11700(3%) = $401700

=>401700/ (11% - 3%) = $5021250

Present value

= 5021250 / (1.11)5 =

b. Nabor Industries’ common stock value = Total value - Debt value - Preferred stock value

= $4051598 - $1500000 -$400000 = $2151598

c. If the firm plans to issue 200,000 shares of common stock, its estimated value per share = $2151598 / 200000 = $10.76 per share

year free cash flow $ Discount value 11% Present value of future Free Cash Flows $ 1 200000 0.901 180200 2 250000 0.812 203000 3 310000 0.731 226610 4 350000 0.659 230650 5 390000 0.593 231270 6

390000+11700(3%) = $401700

=>401700/ (11% - 3%) = $5021250

Present value

= 5021250 / (1.11)5 =

$2979868 Total Value of the Firm $4051598

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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