Question

Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $2,450.00 million this year (FCF₁ = $2,450.00 million), and the FCF is expected to grow at a rate of 21.40% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.82% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Extensive Enterprise Inc.’s weighted average cost of capital (WACC) is 8.46%, what is the current total firm value of Extensive Enterprise Inc.? (Note: Round all intermediate calculations to two decimal places.)

$73,443.95 million

$71,052.68 million

$59,210.57 million

$7,617.35 million

Extensive Enterprise Inc.’s debt has a market value of $44,408 million, and Extensive Enterprise Inc. has no preferred stock. If Extensive Enterprise Inc. has 225 million shares of common stock outstanding, what is Extensive Enterprise Inc.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$72.37

$65.79

$197.37

$64.79

Answer 1

1)

FCF1 = 2,450

FCF2 = 2,450 (1 + 21.4%) = 2,974.3

FCF3 = 2,974.3 (1 + 21.4%) = 3,610.8002

FCF4 = 3,610.8002 (1 + 2.82%) = 3,712.624766

Value at year 3 = FCF4 / required rate - growth rate

Value at year 3 = 3,712.624766 / 0.0846 - 0.0282

Value at year 3 = 3,712.624766 / 0.0564

Value at year 3 = 65,826.68025

Total firm value = Present value of cash flows

Total firm value = 2,450 / (1 + 0.0846)^1 + 2,974.3 / (1 + 0.0846)^2 + 3,610.8002 / (1 + 0.0846)^3 + 65,826.68025 / (1 + 0.0846)^3

Total firm value = 2,258.897289 + 2,528.398773 + 2,830.053578 + 51,593.28172

Total firm value = $59,210.57 million

2)

Intinsic value per share = (Total value - debt) / shares outstanding

Intinsic value per share = (59,210.57 - 44,408) / 225

Intinsic value per share = $65.79