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 7% rate. Dozier's weighted average cost of capital is WACC = 18%.
| Year | |||
| 1 | 2 | 3 | |
| Free cash flow ($ millions) | -$20 | $30 | $40 |
What is Dozier's 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
What is the current value of operations for Dozier? Do not round
intermediate calculations. Round your answer to two decimal
places.
$ million
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? Do not round intermediate calculations. Round your answer to the nearest cent.
| (a) | Horizon value = | FCF4/(Re-g) x 1/(1+Re)^3 | ||||
| [(40x1.07)/(0.18-0.07)][1/(1.18^3)] | ||||||
| 236.8127 | ||||||
| (b) | Year | FCF | PV factor @ 18% | PV of FCF | ||
| 1 | -20 | 0.847458 | -16.9492 | |||
| 2 | 30 | 0.718184 | 21.54553 | |||
| 3 | 40 | 0.608631 | 24.34523 | |||
| 28.94162 | ||||||
| Value of firm = | 28.94162 + 236.8127 = | 265.7544 | ||||
| (c ) | Value of firm = | 265.7544 | ||||
| Less; | Value of Securities = | 10 | ||||
| Less; | Value of debt = | 100 | ||||
| Value of equity = | 155.7544 | |||||
| No. of shares= | 10 | |||||
| Value per share = | Value of equity/ No. of shares = | 15.57544 | ||||
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