Question

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 |

Answer #1

Given about Frank Bread Company,

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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