Question

Discounted Cash Flows Valuation An analyst makes the following forecasts of cash flows for a firm with $2.5 billion of debt at the end of 2015 (in millions of dollars): 2016 2017 2018 Cash from operations 1,439 1,726 1,894 Cash investments 539 624 834 He forecasts that free cash flows will grow at 4% per year after 2018. Using a required return for operations of 10%, value each of the firms 2,453 million outstanding shares.

2. Simple Valuation An analyst forecasts that a stock’s dividends per share will be $2.00 in the coming year, and further expects dividends to grow at a rate of 3% per year indefinitely after that. Investors require a return of at least 9% for the stock. Value this stock.

Answer 1

1)		2015	2016	2017	2018
	Cash from operations		1439	1726	1894
	Cash investment		539	624	834
	Free cash flow		900	1102	1060
	PVIF at 10%	1	0.90909	0.82645	0.75131
	PV at 10%		818	911	796
	Cumulative PV years 1 to 3	2525
	Continuing value = 1060*1.04/(0.10-0.04) =				18373
	PV of terminal value = 18373*0.75131 =	13804
	Value of the firm	16329
	Value of debt	2500
	Value of common equity	13829
	Number of shares	2453
	Value of one share	$        5.64
2)	Value of the stock using the constant dividend growth model = 2/(0.09-0.03) =	$      33.33