Question

DMH Enterprises’ 2016 and 2017 balance sheets (in thousands of dollars) are shown below:

	2017	2016
Cash	$102,850	$89,725
Accounts Receivable	103,365	85,527
Inventories	38,444	34,982
Total Current Assets	$244,659	$210,234
Net Fixed Assets	67,165	42,436
Total Assets	311,824	$252,670
Accounts Payable	$30,761	$23,109
Accruals	30,477	22,656
Notes Payable	16,717	14,217
Total current liabilities	$77,955	$59,982
Long-term debt	76,264	63,914
Total Liabilities	$154,219	$123,896
Common Stock	100,000	90,000
Retained Earnings	57,605	38,744
Total Common Equity	$157,605	$128,774
Total Liabilities and Equity	$311,824	$252,670

Sales for 2017 were $455,150,000, and EBITDA was 35% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40% and DMH pays 40% of its net income as dividends. Calculate free cash flow for 2017.

Free cash flow is expected to grow at a rate of 12% over the next 2 years, at 10% for the following 2 years and then it will level off to 8%. Value the firm’s common stock using the corporate valuation model. The market value of debt is $1.2 billion and the firm has 200 million shares of common stock outstanding. DMH Enterprises weighted average cost of capital is 10%.

Answer 1