Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $3,4
ID: 2787833 • Letter: E
Question
Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $3,450.00 million this year (FCF1 $3,450.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF2 and FCF), After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCFa). If Extensive Enterprise Inc.'s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Extensive Enterprise Inc.? O $114,639.88 million O $113,609.20 million $94,674.33 million O s10,835.21 million Extensive Enterprise Inc.'s debt has a market value of $71,006 million, and Extensive Enterprise Inc. has no preferred stock. If Extensive Enterprise Inc. has 525 million shares of common stock outstanding, what is Extensive Enterprise Inc.'s estimated intrinsic value per share of common stock? $45.08 O $44.08 $49.59 O $135.25 Flash Player MAC 27,0,0,187 3 3.34.1 8 2004-2016 Aplia. All rights reserved. 2013 Cengage Learning except as noted. All rights reserved Grade It Now Save & ContinueExplanation / Answer
FCF 1 = 3450
FCF 2 = 3450*(1+0.202) = 4146.90
FCF 3 = 4146.90*(1+0.202) = 4984.57
FCF 4 = 4984.57*(1+0.0246) = 5107.19
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P3 = FCF4/(R-g) = 5107.19/(0.0738-0.0246) = 103804.76
To find the present value, discount the future FCF and P3
P0 = 3450/(1+0.0738)^1 + 4146.90/(1+0.0738)^2 + 4984.57/(1+0.0738)^3 + 103804.76/(1+0.0738)^3 = $94674.33
Enterprise value = $94674.33 million
Option C
b.
Value of equity = Enterprise value - value of debt
equity = 94674.33 - 71006 = 23668.40
Value per share = Equity value/no. of shares = 23668.40/525 = 45.08 per share
Option A.
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