Question

Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years.

Year 1 2 3 4 5
FCF (Rs. Million) 51 70 77 72 80

After this time period, the free cashflows will grow constantly at 3% per year. The firm’s cost of capital is 13%. Using the discounted free cashflow model, calculate the following.

a. What is the enterprise value of Fauji Fertilizer Ltd? (2.5 marks)
b. If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? (2.5 marks)
c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not? (1 mark)

Answer 1

FCF year 5 =80

growth rate constant thereafter (g) =3%

wacc (k) =13%

Terminal value at year 5 = FCF 5*(1+g)/(k-g)

=80*(1+3%)/(13%-3%)

=824

Enterprise value = FCF1/(1+k)^1+ FCF2/(1+k)^2+ FCF3/(1+k)^3+ FCF4/(1+k)^4 + (FCF5+TV)/(1+k)^5

=(51/(1+13%)^1) +(70/(1+13%)^2 + (77/(1+13%)^3) + (72/(1+13%)^4) + ((80+824)/(1+13%)^5))

=688.1318042

So Enterprise value of firm is $688.13 million

b.

Value of equity = Enterprise value - Value of debt + cash

=688.1318042-280+32

=440.1318042

per share price = value of equity/number of shares

=440.1318042/40

=11.00329511

So stock price should be $11.00

c

If market price of stock is $12. It means stock is trading above intrisic or expected price So it is overpriced. So we should not buy the security.