Question

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 8% rate. Dantzler's WACC is 10%. Year 2 FCF ($ millions) - $21 $ 10 $45 a. What is Dantzler's horizon, or continuing, 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. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. million b. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations. million c. Suppose Dantzler has $197 million of debt and 23 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

Answer 1

a]

horizon value = year 3 FCF * (1 + growth rate after 3 years) / (WACC - growth rate after 3 years)

horizon value = $2,430.00 million

b]

firm value = present value of next 3 years FCF + present value of horizon value

present value = future value / (1 + WACC)number of years

firm value = $1,848.68 million

c]

price per share = (firm value - debt) / shares outstanding

price per share = ($1,848.68 million - $197 million) / 23 million

price per share = $71.81

A B 1 Year FCF C D E P V of FCF PV of HV HV 0 1 (21.00) 2 10.00 3 45.00 2,430.00 Firm Value (19.09) 8.26 33.81 1,848.68 1,825.69