Question

Our acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. We expect the company to produce free cash flows of -$8 million in one year, $5 million in two years, and $6 million in three years. After three years, free cash flow will grow at a rate of 5%. Its WACC is 10% and it currently has 2 million shares of stock. Find price per share.

Group of answer choices

48.01

31.24

20.08

28.02

Answer 1

The price per share is computed as shown below:

= FCF in year 1 / (1 + WACC) + FCF in year 2 / (1 + WACC)² + FCF in year 3 / (1 + WACC)³ + 1 / (1 + WACC)³ [ FCF in year 3 (1 + growth rate) / ( WACC - growth rate) ]

= - $ 8 million / 1.10 + $ 5 million / 1.10² + $ 6 million / 1.10³ + 1 / 1.10³ [ ($ 6 million x 1.05) / (0.10 - 0.05) ]

= - $ 8 million / 1.10 + $ 5 million / 1.10² + $ 6 million / 1.10³ + $ 126 million / 1.10³

= - $ 8 million / 1.10 + $ 5 million / 1.10² + $ 132 million / 1.10³

= $ 96.03305785 million

So, the value per share will be as follows:

= ($ 96.03305785 million - debt) / Number of shares

= ($ 96.03305785 million - $ 40 million) / 2 million shares

= $ 28.02 Approximately