Question

- Scampini Technologies is expected to generate $175 million in free cash flow next year, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 15%. If Scampini has 55 million shares of stock outstanding, what is the stock's value per share?

- Enterprises recently paid a dividend, D₀, of $3.75. It expects to have nonconstant growth of 15% for 2 years followed by a constant rate of 9% thereafter. The firm's required return is 18%.

1. How far away is the horizon date?
   1. The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero.
   2. The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
   3. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
   4. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
   5. The terminal, or horizon, date is infinity since common stocks do not have a maturity date.
   
   
2. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.
3. What is the firm's intrinsic value today, ? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

1. Value of the firm=FCF1/(WACC-growth rate)=175/(15%-5%)=$1750 million

As there is no debt and preferred stock, Value of the equity=Value of the firm=$1750 million

Value of the Stock per share=Value of the equity/number of shares=$1750 million/55 million=$31.82

2.a. Option IV is correct. We have to find terminal value which becomes constant rate from the end of the year2.

b. D0=$3.75

First two years it grows at 15% and then at 9% forever

D1=D0*(1+15%)=3.75*1.15=$4.31

D2=D1*(1+15%)=$4.31*1.15=$4.96

D3=D2*(1+9%)=$4.96*1.09=$5.41

Terminal value at the end of year2=D3/(required rate-growth rate)=$5.41/(18%-9%)=$60.06

c. Firm's intrinsic value today=(D1/(1+18%))+((D2+Terminal value at the end of year2)/(1+18%)^2)

=(4.31/1.18)+(65.02/1.18^2)

=3.65+46.70

=$50.35