Question

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 9% rate. Dozier's weighted average cost of capital is WACC = 16%.

	Year
	1	2	3
Free cash flow ($ millions)	-$20	$30	$40

1. What is Dozier's terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places.
   
   $   million
   
2. What is the current value of operations for Dozier? Round your answer to two decimal places. Round intermediate calculations to two decimal places.
   
   $   million
   
3. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Round your answer to the nearest cent. Round intermediate calculations to two decimal places.

Answer 1

The formula for calculation of Terminal value is:

TV = [FCF * (1 + g)]/(WACC - g)

where,

TV = Termianl Value

FCF = Free Cashflow of Last Forecast Period

g = growth rate

WACC = Weighted Average cost of capital

= 40*(1+9%)/(16% - 9%)

= $622.86

(b). Computation of current value of operations:

Year	Cash FLow	PVIF @ 16%	DCF
1	-20	0.862	-17.24
2	30	0.743	22.29
3	40	0.641	25.64
3	622.86	0.641	399.25
	value of operations		429.94

(c). Intrinsic value per share =

(ma+rketable security + terminal value - value of debt)/ number of share o/s

= (10+622.86-100)/10

= $53.29