Question

Carolina is considering an acquisition of Double Crossing Inc. (DC). Before initiating negotiations with DC, Carolina’s management needs to understand intrinsic value of DC (find total firm value and price per share of DC Inc.). Use the following information: Debt: $200 million Common stock shares outstanding: 25 million Expected FCF in 2016: $60 million FCF growth rate: 2.0% WACC: 7.0%

Answer 1

Value of Debt = $200 million
Number of Common stock shares outstanding = 25 million
Expected FCF = $60 million
FCF growth rate, g = 2.0%
WACC = 7.0%

Intrinsic Value of Firm = Expected FCF / (WACC - g)
Intrinsic Value of Firm = $60 million / (0.07 - 0.02)
Intrinsic Value of Firm = $1,200 million

Value of Common Stock = Intrinsic Value of Firm - Value of Debt
Value of Common Stock = $1,200 million - $200 million
Value of Common Stock = $1,000 million

Price per share = Value of Common Stock / Number of Common stock shares outstanding
Price per share = $1,000 million / 25 million
Price per share = $40