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 5% rate. Dozier's weighted average cost of capital is WACC = 15%.

 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 = Free cash flow for year 4/ Required rate of return - Growth rate
Growth rate = 5%
Required rate of return = 15%
Free cash flow for year 4 = Free cash flow for year 3(1+ growth rate)
= 40(1+5%)
=40(1.05)
= \$42 million
Thus Horizon value = 42/15%-5%
=42/10%
=\$420 million

b) Statement showing current value of operations for Dozier

 Year Cash flow PVIF @ 15% PV 1 -20 0.8696 -17.39 2 30 0.7561 22.68 3 40 0.6575 26.30 Horizon Value 420 0.6575 276.16 current value of operations for Dozier 307.75

Thus current value of operations for Dozier = \$ 307.75 million

c) Statement showing intrinsic price per share

 Particulars Figues in million Current value of operations for Dozier 307.75 Less : Marketable securities 10 Debt 100 Total Equity 197.75 No of shares 10 Price per share (197.75/10) 19.75

Intrinsic price per share = \$ 19.75