Question

IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development​ strategy, in late 2013 you initiate discussions with​ IDX's founder about the possibility of acquiring the business at the end of 2013. Estimate the value of IDX per share using a discounted FCF approach and the following​ data:

​Debt: $ 26 million bullet

Excess​ cash: $ 116 million bullet

Shares​ outstanding: 50 million bullet

Expected FCF in​ 2014: $ 46 million bullet

Expected FCF in​ 2015: $ 59 million bullet

Future FCF growth rate beyond​ 2015: 5 % bullet

​Weighted-average cost of​ capital: 9.4 %

Answer 1

FCF, 2014 = $46 million
FCF, 2015 = $59 million
Growth rate, g = 5%

FCF, 2016 = FCF, 2015 * (1 + g)
FCF, 2016 = $59 million * 1.05
FCF, 2016 = $61.95 million

Horizon Value of Firm = FCF, 2016 / (WACC - g)
Horizon Value of Firm = $61.95 million / (0.094 - 0.05)
Horizon Value of Firm = $1,407.95 million

Current Value of Firm = $46 million / 1.094 + $59 million / 1.094^2 + $1,407.95 million / 1.094^2
Current Value of Firm = $1,267.74 million

Value of Equity = Current Value of Firm - Value of Debt + Excess Cash
Value of Equity = $1,267.74 million - $26 million + $116 million
Value of Equity = $1,357.74 million

Price per share = Value of Equity / Shares outstanding
Price per share = $1,357.74 million / 50 million
Price per share = $27.15