XX Corporation is a fast-growing supplier of office products. Analysts project t
ID: 2733716 • Letter: X
Question
XX Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier's weighted average cost of capital is WACC = 14%. Year 1 2 3 Free cash flow ($ millions) -$20 $30 $40
What is the current value of operations for Dozier? Round your answer to two decimal places. Round intermediate calculations to two decimal places. $ X million Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock.
What is the intrinsic price per share? Round your answer to the nearest cent. Round intermediate calculations to two decimal places.
Explanation / Answer
We first need to compute the horizon value:
Horizon value= FCF3 x (1+g) / (R-g)
= 40 x (1+0.07)/ (0.14-0.07)
= 611.4286
Now we will calculate PV of cash flows by multiplying the cash flow with the PV factor:
Year
Cash flow
PV factor 14%
PV
1
20
0.877193
17.54
2
30
0.769468
23.08
3
40
0.674972
27.00
3
611.4286
0.674972
412.70
480.32
Hence, the value of firm’s operations is 480.32 million
Value of equity = Value of operations + marketable securities – Debt
= 480.32 million + 10million – 100 million
= 390.32 million
Intrinsic value per share = value of equity/ no. of shares
= 390.32 million / 10 million
= 39.03
Year
Cash flow
PV factor 14%
PV
1
20
0.877193
17.54
2
30
0.769468
23.08
3
40
0.674972
27.00
3
611.4286
0.674972
412.70
480.32
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