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 10%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $11 | $18 | $47 |
Answers:
a:$2538.00 million
b:$1947.02 million
c:$111.00125
Explanations:
(a): Horizon value = FCF of year 3 *(1+g)/(WACC-g)
= 47*1.08 /(10%-8%)
= 2538.00 million
(b): Current value = present value of FCF of years 1 to 3 + present value of horizon value
= -11/1.1 + 18/1.1^2 + 47/1.1^3 + 2538/1.1^3
= $1947.02 million
(c ): Value of equity = value of firm – value of debt
= $1947.02 million - $171 million
= $1776.02 million
Current price per share = $1776.02 million/16 million shares
= $111.00125
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