Question

VALUATION EXERCISE

Place a value on Capital Corn, the following information is relevant:

1. Use a 4-year time horizon to forecast free cash flow.

B) Free cash flow in 2010, at the end of the fiscal year, was $964,215 (at fiscal year-end 2004 free cash flow was $658,572.)

C) The compound growth rate of free cash flow is expected to continue up to the horizon period (the terminal year); after which a perpetual growth rate of 2% is likely.

D) Selected capital market data is:

• yield on 10-year Treasury securities is 3.5%.
• Betas for 6 similar companies average 1.286x;
• historical return (10 years) on a broad market average of common stock is 10%.

(Please make certain you show clearly the discount rate, the terminal value, and the total value for the firm.)

Answer 1

First of all lets find CAGR

CAGR = (Cash flow 2010 / Cash flow 2004)^1/n - 1

n = no of years = 6

CAGR = (964215/658572)^1/6 - 1

=1.4641^0.16667 - 1

=1.06560-1

=6.56 %

Now lets calculate Discount rate

Discount rate = Risk free rate of return + beta(Market return - risk free rate of return)

= 3.5% + 1.286(10%-3.5%)

= 3.5% + 1.286(6.5%)

= 3.5% + 8.36%

=11.86%

Statement showing  value on Capital Corn

Year	Cash flow	PVIF @ 11.86%	PV
2011	964215 x (1.0656)	1027468	0.8940	918529.8623
2012	1027468 x (1.0656)	1094869	0.7992	875009.3164
2013	1094869 x (1.0656)	1166693	0.7145	833550.8024
2014	1166693 x (1.0656)	1243228	0.6387	794056.6199
P2014/Terminal value (Note 1)		12860979	0.6387	8214379.613
Value of company				11635526.21

Thus Value of company = $11635526.21

Note 1) teminal value

P2014 = Cash flow of 2015/Ke-g
Here g = 2%
Ke = 11.86%
Thus Cash flow fo 2014(1+2%) / 11.86%-2%
=1243228(1.02)/ 9.86%
=1268092.56/9.86%
=12860979 $