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, D_{0}, 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%.

- How far away is the horizon date?
- 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.
- The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero.
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of Year 2.
- The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.
- The terminal, or horizon, date is infinity since common stocks do not have a maturity date.

- What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent.
- 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

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