Question

Problem 7-18
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 8% rate. Dozier's weighted average cost of capital is WACC = 16%.

	Year
	1	2	3
Free cash flow ($ millions)	-$20	$30	$40

What is Dozier's horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places.

$________ million

What is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places.

$__________ million

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? Do not round intermediate calculations. Round your answer to the nearest cent.

$____________

Answer 1

Present value (PV) = sum of present value of all future cash flows

After end of 3 years there is a perpetuity model with constant growth which can be calculated using the formula FCF* (1+ FCF growth rate)/ (return rate - growth rate) which needs to be discounted back from year 3 to year 0 (present value)

Horizon value (at end of year 3) = 40*(1+8%)/(16%-8%)=$540 mn

Current value of operations =PV = -20/(1+16%)+30/(1+16%)^2+40/(1+16%)^3+40*(1+8%)/(16%-8%)/(1+16%)^3=$376.63 mn

Value of equity = PV - value of debt = $376.63 mn - $100 mn=$276.63 mn

Intrinsic Share value = value of equity / no of shares = $276.63 mn/10mn=$27.67