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