Question

Soul Enterprises recently paid a dividend, D0, of $1. It expects to have non constant growth of 10% for 3 years followed by a constant rate of 6% thereafter. The firm’s required rate of return is 11%. What is the intrinsic value of the stock today? Wesson Technologies is expected to generate $100 million in FCF next year and FCF is expected to grow at a constant rate of 4% per year. Wesson has $200 million in debt, no preferred stock, and its WACC is 12%. If Wesson has 40 million shares of stock outstanding, what is the stock’s value per share? Please show step by step in excel formula

Answer 1

Symbol Given : Soul Enterprises Growth Rate (G) 1st Year 2nd Year 3rd Year Thereafter G1 Rate 10% 10% 10% 6% 3 WN Q DO (Current Dividend) R (Discount Rate) $ 1 11% Wesson Tehnologies FCF year 1 growth (G) Debt WACC [R] shares outstanding 100 4% 200 million 12% 40 million Solution:- Part a) Soul Enterprises As we know, that intrinsic value of stock is present value of future cash flow D3 Р Intrinsic value D1 1+R D2 (1+R)^2(1+r)^3 +- (1+r)^3 Where D1 = DO(1+G1) D2 = D1(1+G2) D3 = D1(1+G3) Dividend at end of 1st year Dividend at end of 2nd year Dividend at end of 3rd year D3(1+Gn) (R - Gn) P (Price of Stock) Hence Using above formula Intrinsic value ($) +- + 1.1 - +- 1.11 = 0.991 + = 23.58 1.21 1.2321 0.9821 + 1.331 1.3676 0.9732 + 28.2172 1.367631 20.63217 Hence, Intrinsic Value of Soul Enterprise is 23.58 $ Part b) Wesson Technologies As we know, that value of an enterprise is present value of future cash flow FCF TV Intrinsic value 1+R 1+R Where FCF FCF at end of 1st year FCF(1+G) (R - G) TV

Hence Using above formula Intrinsic value ($) -_100 1300 - +- 1.12 1.12 89.29 + 1160.7 1250 Million $ = Particulars Value of Wesson Technologies Less: Debt Value of Equity Number of outstanding share Stock Value per share Figure ($) 1250 200 1050 40 26.25 Hence, Intrinsic Value of Soul Enterprise is 26.25 $