Assume the following five years of pro forma expected earnings for XYZ company (

Question

Assume the following five years of pro forma expected earnings for XYZ company (all in thousands):

Year   CFO  After-tax Interest Net Change in Fixed Capital

2017E 2000 200 600

2018E 1000 250 (150)

2019E 2500 350 250

2020E 3000 300 1,000

2021E 2800 100 (100)

Assume that FCFF will grow at a constant rate of 5% after FY2021, and a WACC of 15%. Also, assume the company currently holds debt with a market value of $2.5m and 100m shares of stock outstanding. Use a two-period FCFF model to estimate the stock's intrinsic value.

Explanation / Answer

Firm value

=((2000+200-600)/1.15^1+(1000+250+150)/1.15^2+(2500+350-250)/1.15^3+(3000+300-1000)/1.15^4+(2800+100+100)/1.15^5+((3000*1.05)/(15%-5%))/1.15^5)*1000

=22627077.52

the stock's intrinsic value=((22627077.52/1000000)-2.5)/100=0.20 per share

the above is answer

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