Question

5.

Free Cash Flow Valuation

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 5% rate. Dozier's weighted average cost of capital is WACC = 15%.

Year	1	2	3
Free Cash Flow ($ millions)	-$20	$30	$40

What is Dozier's horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Ans:$_________ million

What is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places.

Ans:$_______ million

Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent.

Ans: $___________

Answer 1

	WACC=	15.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	-20		-20	1.15	-17.3913
2	-20	0.00%	30		30	1.3225	22.68431
3	30	0.00%	40	420	460	1.520875	302.45747
	Long term growth rate (given)=	5.00%			Value of operations=	Sum of discounted value =	307.75
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Enterprise value = Equity value+ MV of debt

- Cash & Cash Equivalents

307.75 = Equity value+100-10

Equity value = 217.75

share price = equity value/number of shares

share price = 217.75/10

share price = 21.78