Question

# Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts project the...

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
1. 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

2. 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

3. 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