Question

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 10% rate. Dozier's weighted average cost of capital is WACC = 13%. 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. $

Answer 1

Dozier's Horizon Value

Horizon Value = CF in Year 3(1+g) / (Ke – g)

= $40(1 + 0.10) / (0.13 – 0.10)

= $44.00 / 0.03

= $1,466.67

“Dozier's Horizon Value = $1,466.67”

Current value of operations for Dozier

Current value of operations for Dozier = CF1/(1 + r)¹ + CF2/(1 + r)² + CF3/(1 + r)³ + HV/(1 + r)³

= -$20/(1 + 0.13)¹ + $20/(1 + 0.13)² + $40/(1 + 0.13)³ + $1,466.67/(1 + 0.13)³

= [-$20 / 1.13] + [$30 / 1.2769] + [$40 / 1.44290] + [$1,466.67 / 1.44290]

= -$17.70 + $23.49 + $27.72 + $1,016.47

= $1,049.99 Million

“Current value of operations for Dozier = $1,049.99 Million”

Intrinsic price per share

Intrinsic price per share = [Value of operation + Marketable securities – Debt] / Number of stocks outstanding

= [$1,049.99 Million + $10 Million – $100 Million] / 10 Million shares

= $959.99 Million / 10 Million shares

= $96.00 per share

“Intrinsic price per share = $96.00 per share”