Question

1. A company is projected to generate free cash flows of $159 million next year and $204 million at the end of year 2, after which it is projected grow at a steady rate in perpetuity. The company's cost of capital is 9.7%. It has $171 million worth of debt and $51 million of cash. There are 27 million shares outstanding. If the exit multiple for this company's free cash flows (EV/FCFF) is 5.1, what's your estimate of the company's stock price? Round to one decimal place.

2. You are valuing Soda City Inc. It has $114 million of debt, $84 million of cash, and 164 million shares outstanding. You estimate its cost of capital is 11.6%. You forecast that it will generate revenues of $711 million and $789 million over the next two years, after which it will grow at a stable rate in perpetuity. Projected operating profit margin is 26%, tax rate is 27%, reinvestment rate is 31%, and terminal EV/FCFF exit multiple at the end of year 2 is 13. What is your estimate of its share price? Round to one decimal place.

Answer 1

1. EV at the end of year 2 = 204 * 5.1 = 1040.4

Calculation of EV at Year 0

Year	Particulars	Amount	PV @ 9.7%
1	FCFF	159	145
2	FCFF	204	170
2	Terminal Value	1,040	865
	Enterprise Value		1,179

Enterprise Value = Value of Equity + Value of Debt - Cah

Value of Equity = 1179 - 171 + 51 = $ 1059 millioin

Value per Share = 1059 / 27 = $ 39.22

2. EV at the end of year 2 = 84 * 2 = 168

Calculation of EV at Year 0

Year	Particulars	Amount	PV @ 11.6%
1	FCFF	114	102
2	FCFF	84	67
2	Terminal Value	168	135
	Enterprise Value		304

Enterprise Value = Value of Equity + Value of Debt - Cah

Value of Equity = 304 - 114 +84 = $ 274.49 million

Value per share = 274.49 / 164 = $ 1.67