Question

Slalom Corporation retains and reinvests all its earnings. So, Slalom does not pay any dividends, and it has no plans to pay dividends any time soon. A major pension fund is interested in purchasing Slalom’s stock. The pension fund manager has estimated Slalom’s free cash flows for the next 3 years as follows: $5,000,000, $9,000,000, and $12,000,000. After Year 3, free cash flow is projected to grow at a constant 4%. Slalom’s WACC is 10%, the market value of its debt and preferred stock totals $27,272,727, Slalom has $10,000,000 in non-operating assets, and it has 5,000,000 shares of common stock outstanding. Based on this information answer the following questions:

1. What is the value of the company’s operations? (please round your answer to the nearest whole number)

2. What is the value of the company? (please round your answer to the nearest whole number)

Answer 1

1.Value of operations is equal to the present value of all future free cash flows

= 5,000,000/(1.10) + 9,000,000/(1.10)^2 + 12,000,000/(1.10)^3 + 12,000,000*(1.04)/(1.10)^3(10%-4%)

= $177,272,727.27

2.Value of company = Value of operations + Non operating Assets

= $187,272,727.27