Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five...

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:

Year 1 2 3 4 5
FCF ($millions) 53 68 78 75 82

After then, the free cash flows are expected to grow at the industry average of 4% per year (continuation value). Using the discounted free cash flow model and a weighted average cost of capital of 14%, estimate the approximate share price for Heavy Metal if the firm has $50 million in excess cash, financial debt (short and long term) of $150 million, and 40 million shares outstanding. (Hint: Find the Enterprise Value).

A. $9.5

B. $11.5

C. $13.0

D. $15.5

Homework Answers

Answer #1

Enterprise Value = PV of FCFF

PV = Cash Flows at time t/ ((1+r)^t)

Cash flow in year 5 = 82 + Terminal value

Terminal Value = [$82*(1.04)] / (0.14 -0.04) = $852.8

Cash flow in year 5 = 82 + 852.8 = 934.8

Years Cash Flows PV
1 53 46.49
2 68 52.32
3 78 52.65
4 75 44.41
5 934.8 485.51
WACC 14%
Value 681.37

Enterprise Value = $681.37

Market Value of Equity + Market Value of Debt - Cash and Cash Equivalents = $681.37

Market Value of Equity = $681.37- $150 + $50

Market Value of Equity = $581.37

Share Price = $581.37/ 40 = $14.53

Note: Please confirm if the options given are correct.

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