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 10% rate. Dozier's weighted average cost of capital is WACC = 13%.

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

1. 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
   
2. What is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places.
   
   $ million
   
3. 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

Answer a.

FCF1 = -$20 million
FCF2 = $30 million
FCF3 = $40 million

Growth Rate, g = 10%
WACC = 13%

FCF4 = FCF3 * (1 + g)
FCF4 = $40 million * 1.10
FCF4 = $44 million

Horizon Value = FCF4 / (WACC - g)
Horizon Value = $44 million / (0.13 - 0.10)
Horizon Value = $1,466.67 million

Answer b.

Value of Enterprise = -$20 million / 1.13 + $30 million / 1.13^2 + $40 million / 1.13^3 + $1,466.67 million / 1.13^3
Value of Enterprise = $1,049.99 million

Answer c.

Value of Equity = Value of Enterprise - Value of Debt + Value of Marketable Securities
Value of Equity = $1,049.99 million - $100.00 million + $10.00 million
Value of Equity = $959.99 million

Price per share = Value of Equity / Number of shares outstanding
Price per share = $959.99 million / 10 million
Price per share = $96.00