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 |
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 = 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
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