Question

# Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts project the...

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 :(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

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