Question

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 7% rate. Dantzler's WACC is 14%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
	.......	.......	.......	.......	.......	.......	.......	......
FCF ($ millions)			- $6		$25		$59

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.
   $  million
   
2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.
   $  million
   
3. Suppose Dantzler has $195 million of debt and 21 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

Answer 1

Answer a.

FCF1 = -$6 million
FCF2 = $25 million
FCF3 = $59 million

Growth Rate = 7%

FCF4 = FCF3 * (1 + Growth Rate)
FCF4 = $59 million * 1.07
FCF4 = $63.13 million

Horizon Value = FCF4 / (WACC - Growth Rate)
Horizon Value = $63.13 million / (0.14 - 0.07)
Horizon Value = $63.13 million / 0.07
Horizon Value = $901.86 million

Answer b.

Value of Firm = -$6 million / 1.14 + $25 million / 1.14^2 + $59 million / 1.14^3 + $901.86 million / 1.14^3
Value of Firm = $662.53 million

Answer c.

Value of Equity = Value of Firm - Value of Debt
Value of Equity = $662.53 million - $195.00 million
Value of Equity = $467.53 million

Price per share = Value of Equity / Number of shares outstanding
Price per share = $467.53 million / 21.00 million
Price per share = $22.26