Question

# 1. A company is projected to generate free cash flows of \$159 million next year and...

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.

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

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