Dantzler 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. Dantzler's WACC is 14%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $21 | $21 | $42 |
a.Horizon Value = Free cash flow in Year 4/(Required Return – Growth Rate)
= 42(1.05)/(14%-5%)
= $490 millions
b.Market Value today is equal to present value of all future free cash flows
= -21/(1.14) + 21/(1.14)^2 + 42/(1.14)^3 + 490/(1.14)^3
= $356.82 million
c.Value of firm = $356.82 million
Less: Value of Debt = $43.90 million
Value of Equity = 312.92 million
Number of shares = 11 million
Current price per share = $28.447
i.e. $28.45
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