Question

Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 13%, and it has $2,170,000 of debt at market value and $430,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024, are given in the table,

Year
(t) |
Free cash flow
(FCF) |

2020 |
$280,000 |

2021 |
$350,000 |

2022 |
$400,000 |

2023 |
$430,000 |

2024 |
$480,000 |

Beyond 2024 to infinity, the firm expects its free cash flow to grow by 4% annually.

a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.

b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.

c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?

Answer #1

a.Value of the Company=(FCF2020/(1+13%))+(FCF2021/(1+13%)^2)+(FCF2022/(1+13%)^3)+(FCF2023/(1+13%)^4)+((FCF2024+Horizon value at year2024/(1+13%)^5)

Horizon value at year2024=FCF2025/(cost of capital-growth rate)=(FCF2024*(1+4%))/(13%-4%)=(480,000*1.04)/9%=5,546,666.67

Value of the Company=(280000/1.13)+(350000/1.13^2)+(400000/1.13^3)+(430000/1.13^4)+((480000+5,546,666.67)/1.13^5)=247788+274101+277220+263727+3271033=4,333,869

b. Value of common stcok=Value of firm-Value of debt-value of preferred stock=4,333,869-2,170,000-430,000=1733869

c. estimated value per share=Value of common stcok/nu,mber of shares=1733869/200,000=$8.67

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