Question

# Question 12 Frank Martin Bread Company is projected to generate free cash flows of \$85 million...

Question 12

Frank Martin Bread Company is projected to generate free cash flows of \$85 million per year for the next two years, after which it is projected grow at a steady rate in perpetuity. The company's cost of capital is 11%. It has \$250 million of debt and \$12 million in cash. There are 30 million shares outstanding. Comparable companies trade at an average EV/FCFF multiple of 9. Using the exit multiple method for terminal value and DCF for the rest, what is your estimate of its share price?

 a) \$16.1 b) \$17.6 c) \$19.1 d) \$20.1 e) \$21.1

Free cash flow of \$85 million for next 2 years

=> FCF1 = \$85 million

FCF2 = \$85 million

after which it is projected grow at a steady rate in perpetuity

Comparable companies trade at an average EV/FCFF multiple of 9

Based on Exit multiple, EV at year 2 = 9*FCFF = 9*85 = \$765 million

Cost of capital Kc = 11%

=> Value of firm today is sum of PV of future FCF and EV2 discounted at Kc

=> V0 = FCF1/(1+Kc) + FCF2/(1+Kc)^2 + EV2/(1+Kc)^2

=> V0 = 85/1.11 + 85/1.11^2 + 765/1.11^2 = \$766.46 million

given that,  It has \$250 million of debt and \$12 million in cash. There are 30 million shares outstanding.

So, value of stock today = (V0 - MV of debt + cash)/number of share = (766.46 - 250 + 12)/30 = \$17.6

Option b is correct.

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