Question

ABC Corp was created from the combination of two smaller companies two years ago. Selected information is as follows, in millions except percentages:
FCF current year: $215
WACC: 8.5%
Constant growth rate: 3%
Short-term investments: $18
Debt: $47
Preferred stock: $10
Number of common stock shares: 12
A.   Show calculations for ABC’s value of operations.
B.   Show calculations for ABC’s estimated intrinsic stock price.
C.   Which would have the larger effect on your answer in B, a $10 increase in FCF or a 1% decrease in WACC? Show calculations.

Answer 1

a. ABC 's Value of operations =FCF current Year*(1+growth)/(WACC-g) =215*(1+3%)/(8.5%-3% )=4026.364 or 4026.36

b. Intrinsic Value of Share =(Value of operation - -Debt-Preferred Stock)/Number of shares =(4026.364-47-10)/12 =330.78

c. With 10$ increase in FCF
ABC 's Value of operations =FCF current Year*(1+growth)/(WACC-g) =225*(1+3%)/(8.5%-3% )=4213.636
Intrinsic Value of Share =(Value of operation - -Debt-Preferred Stock)/Number of shares =(4213.636 -47-10)/12 =346.39

With 10% decrease in FCF
ABC 's Value of operations =FCF current Year*(1+growth)/(WACC-g) =215*(1+3%)/(7.5%-3% )=4921.11
Intrinsic Value of Share =(Value of operation - -Debt-Preferred Stock)/Number of shares =(4921.11 -47-10)/12 =405.34

Hence 1% decrease in WACC has larger affect on intrinsic value of operations.