Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five​ years:

Year	1	2	3	4	5
FCF​ ($ million)	51.8	67.6	77.2	75.2	81.3

​Thereafter, the free cash flows are expected to grow at the industry average of

3.6%

per year. Using the discounted free cash flow model and a weighted average cost of capital of

13.5%​:

a.  Estimate the enterprise value of Heavy Metal.

b.  If Heavy Metal has no excess​ cash, debt of

$297

​million, and

41

million shares​ outstanding, estimate its share price.

Answer 1

a). Enterprise Value = [FCF1/(1+WACC)] + [FCF2/(1+WACC)²] + [FCF3/(1+WACC)³] + [FCF4/(1+WACC)⁴] + [FCF5/(1+WACC)⁵] + [{FCF5*(1+g)}/{(r-g)*(1+WACC)⁵}]

= [51.8/(1+0.135)] + [67.6/(1+0.135)²] + [77.2/(1+0.135)³] + [75.2/(1+0.135)⁴] + [81.3/(1+0.135)⁵] + [{81.3*(1+0.036)}/{(0.135-0.036)*(1+0.135)⁵}]

= 45.64 + 52.48 + 52.80 + 45.31 + 43.16 + 451.69 = 691.08, or $691.1 million

b). Value of equity = EV - Value of Debt + Cash

= 691.1 - 297 + 0 = $394.1 million

Share Price = Value of Equity / Shares outstanding = 394.1 / 41 = 9.6, or $9.6