Question

An analyst is trying to estimate the intrinsic value of XYV Inc. The analyst has estimated...

An analyst is trying to estimate the intrinsic value of XYV Inc. The analyst has estimated the company’s free cash flows for the following years:

               Year                                                    Free Cash Flow

               1                                                          $3,000

               2                                                          $4,000

               3                                                          $5,500

               4                                                          $8,500

The analyst estimates that after four years (t=4) the company’s free cash flow will grow at a constant rate of 3 per cent per year. The estimated weighted average cost of capital is 8 percent. The company’s debt has a total market value of $75,000 and there are 2,000 outstanding shares of common stock. What is the intrinsic value per share of the company’s stock?

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Answer #1

As per Discounted Cash Flow Valuation,

Firm Value = PV(FCF) + PV(Terminal Value)

FCF1 = $3,000

FCF2 = $4,000

FCF3 = $5,500

FCF4 = $8,500

Terminal Value = FCFi+1(1 + g)/(WACC - g)

g = 3%

WACC = 8%

Firm Value = 3000/(1.08) + 4000/(1.08)2 + 5500/(1.08)3 + 8500/(1.08)4 + 8500(1 + 0.03)/(0.08 - 0.03)(1.08)4

Firm Value = 2777.78 + 3429.36 + 4366.08 + 6247.75 + 128703.73

Firm Value = $145,524.70

Equity Value = Firm Value - Market Value of Debt

Equity Value = 145,524.70 - 75,000

Equity Value = $70,524.70

Number of Shares Outstanding = 2,000

Intrinsic Value per Share = Equity Value/Number of Shares outstanding

Intrinsic Value per Share = 70524.70/2000

Intrinsic Value per Share = $35.26

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