Question

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

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.