Question

Free Cash Flow Valuation

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 10% rate. Dozier's weighted average cost of capital is WACC = 13%.

	Year
	1	2	3
Free cash flow ($ millions)	-$20	$30	$40

1. What is Dozier's horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $   million

2. What is the current value of operations for Dozier? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $   million

3. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

Answer 1

Answer :(a.) Calculation of Horizon Value :

Horizon Value = [Free Cash Flow in year 3 * (1 + growth rate)] / (WACC - growth rate)

= [40 * (1 + 0.10)] / (0.13 - 0.10)

= 1466.67 million

(b.) Value of Operation = 1049.99

Year	Free Cash Flow	PVF @13%	Present Value of Free Cash Flows
1	-20	0.884955752	-17.69911504
2	30	0.783146683	23.4944005
3	40	0.693050162	27.72200649
3	1466.66667	0.693050162	1016.473571
		Total	1049.990863

(c.) Equity Value = Value of Operation + Marketable securities - Value of Debt

= 1049.99 + 10 - 100

= 959.99

Intrinsic price per share = 959.99 / 10

= 96