Question

A company had FCF last year of $90,000. You believe that FCF will grow at a...

A company had FCF last year of $90,000. You believe that FCF will grow at a rate of 6.5% for the next three years. After that, the long-run growth rate will be 3%. The company’s WACC is 10%. The company also has outstanding debt in the amount of $400,000 and has 50,000 shares outstanding.

a. What is the horizon value of FCF at the end of year three?

b. What is the present value of the firm’s operations?

c. What is your estimate of the price per share?

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Answer #1

FCF 0 = 90,000

FCF 1 = 90,000 * (1+0.03) = 92700

FCF 2 = 92700 * (1+0.03) = 95481

FCF 3 = 95481 * (1+0.03) = 98345.43

Answer a)

Value of FCF at 3 year end =

=

= 1,447,082.75571

Answer b)

Present Value of operations =

=

= 1684153.77749

Answer c)

Enterprise Value = Present Value of operations + Debt Value

= 1684153.77749 + 400,000

= 2084153.77749

Value per share = 2084153.77749 / 50,000

= $41.68

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