Question

Sr. financial analyst, Mindy Jo, has forecasted the free cash flows of Southern Sweets to grow by 14.00% next year, 8.00% in the following year and 6.00% in the third year before leveling off to a constant growth rate of 3.00% annually. The firm’s most recently reported free cash flow was $148,000.00. The firm has $6,000.00 in marketable securities, $69,000.00 in long-term debt, $15,000.00 in preferred stock, and $52,000.00 in book common equity. Southern Sweets has 40,000.00 common shares outstanding and a cost of capital of 8.00%.

What is the value of operations for Southern Sweets?

Answer 1

Value of Operations = [{FCF0 * (1 + g1)} / (1 + WACC)] + [{FCF0 * (1 + g1) * (1 + g2)} / (1 + WACC)²] + [{FCF0 * (1 + g1) * (1 + g2) * (1 + g3)} / (1 + WACC)³] + [{FCF0 * (1 + g1) * (1 + g2) * (1 + g3) * (1 + gC)} / {(WACC - gC) * (1 + WACC)³}]

= [{$148,000 * (1 + 0.14)} / (1 + 0.08)] + [{$148,000 * (1 + 0.14) * (1 + 0.08)} / (1 + 0.08)²] + [{$148,000 * (1 + 0.14) * (1 + 0.08) * (1 + 0.06)} / (1 + 0.08)³] + [{$148,000 * (1 + 0.14) * (1 + 0.08) * (1 + 0.06) * (1 + 0.03)} / {(0.08 - 0.03) * (1 + 0.08)³}]

= $156,222.22 + $156,222.22 + $153,329.22 + $3,158,581.89 = $3,624,355.56