Question

What is the value of operations of a company with cash flows of 50 million, a...

What is the value of operations of a company with cash flows of 50 million, a growth rate of 5% for the first 4 years, then 3% thereafter, f the WACC is 8.5% and If that same firm has no debt and 10 million shares, what is the intrinsic value of their stock?

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Answer #1

Cashflows currently , CF0 = 50 million

CF1= 50 million *1.05 =52.5 million

CF2 =52.5*1.05 =55.125 million

CF3= 55.125 *1.05 =57.88125 million

CF4= CF3*1.05 =60.7753 million

CF5 = CF4*1.03 = 62.5985 million

Horizon value of Cashflows (at time 4) , H4 = CF5/(WACC-constant growth rate)

= 62.5985 /(0.085-0.03)

=$1138.15585 million

Value of operations today (value of firm)

= CF1/(1+WACC) + CF2/(1+WACC)^2+CF3/(1+WACC)^3+CF4/(1+WACC)^4+H4/(1+WACC)^4

= 52.5/1.085 + 55.125/1.085^2+57.88125/1.085^3+60.7753/1.085^4+1138.15585/1.085^4

=$1005.646916 million

Company has no debt. So value of firm =value of equity = $1005.646916 million

intrinsic value of stock = $1005.646916 million/10 million = $100.56 per share

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