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 ($ millions)	53	68	78	75	85

After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:

A. Estimate the geometric mean growth rate (also known as CAGR=Compound Average Growth Rate) of Heavy Metal Corporation’s FCF during the period under consideration.

B. Assuming that the rate estimated in (A) will prevail for the foreseeable future, forecast the company’s FCF for years 6 and 7.

C. Estimate the enterprise value of Heavy Metal.

D. If Heavy Metal has no excess cash, has debt of $300 million, and 40 million shares outstanding, estimate its share price.

Answer 1

(A) CAGR = (Ending Value/Beginning Value)^(1/#years) - 1

= (85/53)^(1/5) - 1 = 9.907824407%

(B) FCF_{6_estimate} = 85*1.09907824407 = 93.42165075

FCF_{7_estimate} = 93.42165075*1.09907824407 = 102.6777039

(C) Assuming data given initially,

EV = 53/1.14 + 68/1.14² + 78/1.14³ + 75/1.14⁴ + [85/(0.14-0.04)](1.14^-4)]

=$699.1371 Million

Note: [85/(0.14-0.04)](1.14^-4)] is PV of terminal value.

(D) estimate share price = (EV - debt)/#outstandingShares = (699.1371 - 300)/40 = $9.9784