The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of deb
ID: 2729278 • Letter: T
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 $200,000 2017 250,000 2018 310,000 2019 350,000 2020 390,000 a. Estimate the value of Nabor Industries’ entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor Industries’ common stock value. c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?
Explanation / Answer
(a) Free cash flow to firm (FCFF) = Sum of Present value (PV) of all future cash flows
In 2020, PV of all future cash flows ($) = [Cash flow of 2021 x (1 + growth rate)] / (WACC - Growth rate)
= (390,000 x 1.03) / (0.11 - 0.03) = 401,700 / 0.08 = 5,021,250
(b) Value of common stock = FCFF - Market value of debt - Market value of preferred stock
= $(40,51,624 - 1,500,000 - 400,000) = $2,151,624
(c) Estimated value per share = Value of common stock / Number of stock outtstanding = $2,151,624 / 200,000
= $10.76
Year Cash Flow (CF) ($) Discount factor @11% Discounted CF ($) (A) (B) (C) = (A) x (B) 2016 2,00,000 0.90090 1,80,180 2017 2,50,000 0.81162 2,02,906 2018 3,10,000 0.73119 2,26,669 2019 3,50,000 0.65873 2,30,556 2020 3,90,000 0.59345 2,31,446 2020 50,21,250 0.59345 29,79,867 FCFF = Sum of all PV ($) = 40,51,624Related Questions
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