Question

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.

   $  

Answer 1

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