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

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