Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $4 million, $5 million, $11 million, and $14 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barrett's WACC is 15%, the market value of its debt and preferred stock totals $52 million, and it has 24 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
a. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent.
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b. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$
What is the firm's total value today? Round your answer to the nearest cent.
$
c.What is an estimate of Barrett's price per share? Round your answer to the nearest cent.
$
d.What is an estimate of Barrett's price per share? Round your
answer to the nearest cent.
$
| a) | Calculation of Present Value of Free Cash flow projected during next 4 Years | ||||
| Year | Free Cash Flow | Discounting Factor @ 15% | Present Value of Free Cash flow | ||
| 1 | $ 4,000,000.00 | 0.8696 | $ 3,478,400.00 | ||
| 2 | $ 5,000,000.00 | 0.7561 | $ 3,780,500.00 | ||
| 3 | $ 11,000,000.00 | 0.6575 | $ 7,232,500.00 | ||
| 4 | $ 14,000,000.00 | 0.5717 | $ 8,003,800.00 | ||
| Present Value of Free Cash flow projected during next 4 Years | $ 22,495,200.00 | ||||
| b) | Calculation of Firm's horizon or continuing value | ||||
| = | Cash Flow Year 4 * (1+ grown rate factor ) | * DF ( Year 4 , 15%) | |||
| WACC - Growth Rate | |||||
| = | $ 14,000,000 * 1.07 | * 0.5717 | |||
| 0.15 - 0.07 | |||||
| = | $ 187,250,000.00 | * 0.5717 | |||
| = | $ 107,050,825.00 | ||||
| c) | Calculation of Firm's total value | ||||
| = | Present Value of Free Cash flow projected during next 4 Years | + | Firm's horizon or continuing value | ||
| = | $ 22,495,200.00 | + | $ 107,050,825.00 | ||
| = | $ 129,546,025.00 | ||||
| d) | Calculation of Barrett's Price per share:- | ||||
| = | Total Value of Common Stock | ||||
| No. of common share outstanding | |||||
| = | Total value of the firm - (market value of its debt and preferred stock) | ||||
| No. of common share outstanding | |||||
| = | $ 129,546,025 - $ 52,000,000 | ||||
| 24,000,000 | |||||
| = | $3.23 | ||||
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