Question

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $5 million, $8 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Brandtly's WACC is 15%, the market value of its debt and preferred stock totals $68 million; and it has 22 million shares of common stock outstanding. Write out your answers completely. For example, 13 million should be entered as 13,000,000.

a) What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations. $

b) What is the firm's horizon, or continuing, value? Round your answer to the nearest cent. $

c) What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations. $

d) What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

a.

Present value of the free cash flows projected during the next 4 years, horizon value and current value of firm is calculated in excel and screen shot provided below:

Present value of the free cash flows projected during the next 4 years is $20,225,842.53, horizon value is $200,625,000 and current value of firm is $134,933,837.43.

Value of equity = Value of firm - Debt Value - preferred stock value

= $134,933,837.43 - $68,000,000

= $66,933,837.43.

Value of equity is $66,933,837.43.

Price per share = $66,933,837.43 / 22,000,000

= $3.04.

Intrinsic value of equity is $3.04.