Question

Problem 9-15
Corporate valuation

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 6% rate. Dozier's WACC is 15%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
FCF ($ millions)	.......	.......	.......	.......	.......	.......	.......	......
	NA		- 19		30		60

a. What is Dozier's horizon, or continuing, value?

b. What is the firm's value today?

c. Suppose Dozier has $124 million of debt and 6 million shares of stock outstanding. What is your estimate of the price per share?

Answer 1

a.

Free cash flow in year 3 = $60 million.

Constant growth rate = 6%

Horizon value = $60 × (1 + 6%) / (15% - 6%)

= $63.60 / 9%

= $706.67 million.

Horizon value is $706.67 million.

b.

Value of firm today is calculated in excel and screen shot provided below:

Value of firm is $510.26.

c.

Value of equity = Value of firm - Value of debt

= $510.26 - $124

= $386.26

Value of equity is $386.26.

Intrinsic value of stock = Value of equity / Number of share outstanding

= $386.26 / 6

= $64.38

Intrinsic value of stock is $64.38.