Question

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?

Answer 1

(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