Question

# 8–18 Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts project...

8–18 Free Cash Flow Valuation Dozier 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. Dozier’s weighted average cost of capital is WACC 5 13%. Year 1 2 3 Free cash flow (\$ millions) 2\$20 \$30 \$40 a. What is Dozier’s horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) b. What is the current value of operations for Dozier? c. Suppose Dozier has \$10 million in marketable securities, \$100 million in debt, and 10 million shares of stock. What is the intrinsic price per share?

(a)-Dozier's Horizon Value (HV)

Horizon Value (HV) = CF in Year 3(1+g) / (WACC – g)

= \$40(1 + 0.07) / (0.09) / (0.13 – 0.07)

= \$42.80 / 0.06

= \$713.33

(b)-Current value of operations for Dozier

Current value of operations for Dozier = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + HV/(1+r)3

= -\$20/(1 + 0.13)1 + \$30/(1 + 0.13)2 + \$40/(1 + 0.13)3 + \$713.33/(1 + 0.13)3

= [-\$20 / 1.13] + [\$30 / 1.27690] + [\$40 / 1.44290] + [\$713.33 / 1.44290]

= -\$17.70 + \$23.49 + \$27.72 + \$494.38

= \$527.89 Million

(c)-Intrinsic price per share

Intrinsic price per share = [Value of operation + Marketable securities – Debt] / Number of stocks outstanding

= [\$527.89 Million + \$10 Million - \$100 Million] / 10 Million shares

= \$437.89 Million / 10 Million shares

= \$43.79 per share

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