Question

P7-16 Free cash flow valuation 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 $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The es- timated free cash flows over the next 5 years, 2016 through 2020, are given below. - Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually. Year (t) 2016 2017 2018 2019 2020 Free cash flow (FCF) $200,000 250,000 310,000 350,000 390,000 a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor In dustries' common stock value. c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?

Answer 1

(al value of business = free cash flow for dont free cash flow for left = 290 cash flow (it Crocotter) - 350000C 1.03) 2 $360500. + walio of business on Dodo = 360500 / (.1l-.03) - $4506950 Current business value = 20000 + 250000 + 30gooo + 310,000 (17.11)' (17.11) Holly3 117.1199 + 4856456 (toll) = 3688 597.88 value of business a 3688597.82 less healue of decat = $ 15,00,000 lees- loalue of preferred stock $400000 value of common stocha 1788597.88 nalue of business ger common 1788597.82 stock a 9.0000 2 $8.94