Sleigh Bells Ring & Co. does not pay dividends and does not plan on paying any i

Question

Sleigh Bells Ring & Co. does not pay dividends and does not plan on paying any in the future. Free Cash Flows for the next 3 years as follows:

Year 1: $20 million

Year 2: $27 million

Year 3: $33 million

After the 3rd year, free cash flow is projected to grow at a constant 6%.

SOFSC's WACC is 12%

It has a market value of debt of $20 million, the market value of preferred stock of $50 million, and 20 million shares of stock outstanding.

1. What is the estimated horizon value?

2. What is the firm's estimated total value today?

3. What is the firm's estimated stock price per share?

Explanation / Answer

Answer:

1)calculation of terminal value:

Details of calculating terminal value:

=cashflow of the last year*(1+ terminal growth rate)/(WACC- Terminal growh rate)

=330000000*(1+6/(12-6)

=38.5 million

2.

working notes:

Present value of free cashflow=20000000/(1+0.12)^1+27000000/(1+0.12)^2+33,00,000/(1+0.12)^3+385000000/(1+0.12)^3

Enterprise value = present value of free cash flows+ terminal value of free cash flow

=(17.8 million+21.91 million+24.12 million)+28.15million

=92.03 million

3)

working notes

Equity value=Enterprise value + Preferred stock - debt

=122051132

No of outstanding stock =200000000

Equity per share=Equity value/ no of outstanding share

=$6.10

(ends)

FCFF 1 2 3 Cashflow( in $ Million) 20 27 33 Terminal value growth rate 6% wacc 12% Market value of debt 20 million Prefreed stock 50million No of shares outstanding 20 million

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