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: $ 35 million
• Excess cash: $ 111 million
• Shares outstanding: 50 million
• Expected FCF in 2014: $ 48 million
• Expected FCF in 2015: $ 55 million
• Future FCF growth rate beyond 2015: 6 %
• Weighted-average cost of capital: 9.4 %

a) The terminal enterprise value in 2014 is _____million. (Round to the nearest integer.)

b) The enterprise value in 2013 is _____million. (Round to the nearest integer.)

c) The equity value is ______ million. (Round to the nearest integer.)

d) The value of IDX per share is ______ (Round to the nearest cent.)

Answer 1

a) Terminal Enterprise value or Horizon value in 2014 = Expected FCF in 2015 / (Ke - g)

where, Ke = wacc, g = growth rate

Terminal enterprise value in 2014 = $55 million / (0.094 - 0.06) = $1617.647 million or $1618 million

b) Enterprise value in 2013 is the present value of FCF in 2014 and Terminal enterprise value using WACC as the discount rate.

Enterprise value in 2013 = (FCF in 2014 + Terminal enterprise value in 2014) / (1 + Ke)

or, Enterprise value in 2013 = ($48 million + $1618 million) / (1 + 0.094) = $1523 million

c) Equity value = Enterprise value - Debt + Excess cash = $1523 million - $35 million + $111 million = $1599 million

d) Value of IDX per share = Equity value / no. of shares = $1599 million / 50 million = $31.98