Question

Dantzler 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 8% rate. Dantzler's WACC is 15%.

Year 1 -11

Year 2 30

Year 3    55

What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

Suppose Dantzler has $134.40 million of debt and 16 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250.

Answer 1

a)
Horizon value = FCF3 * (1 + g) / (ke - g)
= ($55 * (1 + 0.08)) / (0.15 - 0.08)
= $59.4 / 0.07
= $848.57

Horizon value = $848.57 million

b)
Value of firm = (FCF1 / (1+r)^1) + (FCF2 / (1+r)^2) + (FCF3 / (1+r)^3) + (Horizon value / (1+r)^3)

= (-11 / 1.15) + (30 / 1.15^2) + (55 / 1.15^3) + (848.57 / 1.15^3)

= -9.5652 + 22.6843 + 36.1634 + 557.9495

= $607.23

Value of firm = $607.23 million

c)
Value of equity = Value of firm - Value of debt
= $607.23 - $134.40
= $472.83

Current price per share = Value of equity / Number of shares
= $472.83 / 16
= $29.55

Current price per share = $29.55