Question

RBG, Inc. FCFs over the next 3 years are projected to be FCF1 = $3 million,...

RBG, Inc. FCFs over the next 3 years are projected to be FCF1 = $3 million, FCF2 = $5 million, FCF3 = $8 million and free cash flows are projected to grow at 4% per year thereafter. RBG, Inc. also has the following information: Market value of RBG Debt = $150 million Short-term investments = $75 million Book value of equity = $160 million Total Assets = $180 million Shares outstanding = 2.5 million Required return on stock = 11% WACC = 9% Calculate RBG's intrinsic equity value per share.

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Answer #1

FCFs for year 1 to 3 hasbeen given.

Growth rate of FCF beyond year 3(g) = 4%

WACC = 9%

Calculating the Enterprise Value ($ millions):-

EV = 2.752 + 4.208+ 6.177 +128.491

EV = $141.63 millions

- Enterprise Value = Market Value of equity + Market Value of Debt - Cash & Cash equivalents

$141.63 millions = Market Value of equity + $150 million - $75 million

Market Value of equity= $66.63 million

- Intrinsic Price per share = Market Value of equity/No of shares outstanding

= $66.63 million/2.5 million

Intrinsic Price per share = $26.65

So, RBG's intrinsic equity value per share is $26.65

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