Free Cash Flow Valuation
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 = 16%.
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.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.
$ million
What is the current value of operations for Dozier? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. 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 = (FCF3 * (1+g)) / (Ke - g)
= ($40 * (1 + 7%)) / (0.16 - 0.07)
= $42.8 / 0.09
= $475.56 million
b)
Current value of operations for Dozier = (FCF1 / (1+r)) + (FCF2 /
(1+r)^2) + ((FCF3 + Horizon value) / (1+r)^3)
= (-$20 / 1.16) + ($30 / 1.16^2) + (($40 + $475.56) / 1.16^3
= -$17.2414 + $22.2949 + $330.2946
= $335.35 million
Current value of operations for Dozier = $335.35 million
c)
Intrinsic price per share =(current value of operation + marketable
securities - debt) / Number of shares
= ($335.35 + $10 - $100) / 10
= $245.35 / 10
= $24.53
Intrinsic price per share = $24.53
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