Question

Year 1 2 3 4

Free Cash Flow $12 million $18 million $22 million $26 million

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrumʹs expected current share price?

A) $12.61

B) $16.40

C) $20.18

D) $20.81

I know how to find FCF5(27.3) and Terminal EV at year 4 (455), but how do I find Terminal EV at year 0 using a BA II Plus calculator?

Answer 1

Annual Free Cash Flows: Year 1 = $ 12 million, Year 2 = $ 18 million, Year 3 = $ 22 million and Year 4 = $ 26 million

WACC = 11 % , Growth Rate = g = 5 %, Cash = $ 85 million and Debt = $ 65 million

Number of Shares Outstanding = N = 30 million

FCF5 = FCF4 x 1.05 = 26 x 1.05 = $ 27.3 million

Terminal EV = FCF5 / (WACC - g) = 27.3 / (0.11 - 0.05) = $ 455 million

Terminal EV at Year 0:

- Input FV = 455, I/Y = 11%, I/Y = 4, PMT = 0

- CMPT -> PV

- PV = - $ 299.723 or $ 299.72 million

PV of Annual Cash Flows at Year 0 = 12 / (1.11) + 18 / (1.11)^(2) + 22 / (1.11)^(3) + 26 / (1.11)^(4) = $ 58.6332 million

Total Firm Value = 58.6332 + 299.7226 = $ 358.356 ~ $ 358.36 million

Equity Value = Firm Value + Cash - Debt = 358.36 + 85 - 65 = $ 378.36 million

Price Per Share = 378.36 / N = 378.36 / 30 = $ 12.612 ~ 12.61

Hence, the correct option is (A)