Question

9-7a Corporate Valuation Model A firm has $20 million of debt and $30 million of preferred stock. It has an expected free cash flow (FCF) of $3 million at the end of period I and $20 million at the end of period 2. The period 3 end FCF is expected to be S 10 million and is then expected to grow at a rate of490 in perpetuity. The WACC is 11%. If there are 2 million shares outstanding, what is the value per share?

Answer 1

Answer:

Period 1 FCF = $3,000,000

Period 2 FCF = $20,000,000

Period 3 FCF = $10,000,000

Period 4 FCF = $10,000,000 * (1 + 4%) = $10,400,000

Period 4 onward, constant growth rate = 4% to perpetuity.

Terminal value as at end of period 3 = Period 4 FCF / (WACC - Constant growth rate)

= $10,400,000 /(11% - 4%)

= $148,571,428.57

Value of company = $3,000,000 / (1 + 11%) + $20,000,000 /(1 + 11%) ² + ($10,000,000)/(1 + 11%) ³ + $148,571,428.57 / (1 + 11%) ³

= $134,881,213.26

Value of common share = Value of company - Value of debt - Value of preference shares

= $134,881,213.26 - $20,000,000 - $30,000,000

= $84,881, 213.26

Value per common share = Value of Equity / Number of shares outstanding = $84,881, 213.26/ 2,000,000 = $42.44

Value per share = $42.44