Question

​(This question has two​ parts.) It is 2020. You are investigating the possibility of making an equity investment in Walkerville Woodworking​ Inc., a firm that specializes in producing​ antique-style furniture with a modern twist. Your research has revealed the following​ information: ​• Walkerville has​ $8 million in excess cash and​ $4.5 million in debt.​ 
 ​• The company is expected to have free cash flow of​ $26 million in 2021 and​ $32 million in 2022.​ 
 ​• Beyond​ 2022, free cash flow is expected to grow at a constant rate of​ 2% per year forever.​ 
 ​• Walkerville’s weighted average cost of capital​ (WACC) is​ 11% and it has 8 million shares outstanding.

a) What is the current enterprise value of Walkerville Woodworking given the above​ assumptions?

b)What should be the price of one share of Walkerville​ stock?

Answer 1

a]

EV = present value of next 2 years FCF + present value of terminal value at end of 2 years

Terminal value at end of 2 years = Year 2 FCF * (1 + growth rate after 2 years) / (WACC - growth rate after 2 years)

Present value = future value / (1 + required return)^{number of years}

EV = $343.74 million

b]

share price = value of equity / shares outstanding

Value of equity = EV - value of debt + value of cash

Value of equity = $343.74 million - $4.5 million + $8 million = $347.24 million

share price = $347.24 million / 8 million

share price = $43.41