Question

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public​ offering, managers at Nabor have decided to make their own estimate of the​ firm's common stock value. The​ firm's CFO has gathered data for performing the valuation using the free cash flow valuation model.The​ firm's weighted average cost of capital is 11%​, and it has $ 2,400, 000 of debt at market value and $480,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5​ years,2020 through

2024​, are given in the​ table:

Year (t) 2020 2021 2022 2023 2024 Free cash flow (FCA) e $220,000 $270,000 $340,000 $400,000 $470,000

Beyond 2024 to​ infinity, the firm expects its free cash flow to grow by 3%annually.

a.Estimate the value of Nabor​ Industries' entire company by using the free cash flow valuation

model. round to the nearest dollar

b.Use your finding in part a​,along with the data provided​ above, to find Nabor​ Industries' common stock value. round to the nearest dollar

c.If the firm plans to issue 200,000 shares of common​ stock, what is its estimated value per​ share? round to the nearest dollar

Answer 1

Answer a:

Given,

Weighted average cost of capital (WACC) = 11%

Perpetual growth rate of FCF beyond 2024 (g) = 3%

Now, Value of Nabor​ Industries' (entire company) =

FCF 2020 FCF 2021 FCF 2022 FCF 2023 (1+WACC)1. (1+WACC)2 (1+WACC)3. (1+WACC) FCF2024 FC F2024 *(1+) (1+WACC)5" (WACC – 9) *(1 + WACC)5

Substituting given values and solving the above equation, we have

Value of Nabor​ Industries' (entire company) = $4,799,478

Answer b:

Nabor​ Industries' common stock value = Value of Nabor​ Industries' (entire company) - Market value of preferred stock - Market value of debt = $4,799,478 - $480,000 - $2,400,000 = $1,919,478

Nabor​ Industries' common stock value is $1,919,478

Answer c:

Estimated value of share (common stock) = Value of common stock / No. of shares of common stock = $1,919,478 / 200,000 = $9.60 per share

Therefore, estimated value of common stock (to the nearest dollar) = $10 per share