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Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $7 million, $9 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 5%. Brandtly's WACC is 12%, the market value of its debt and preferred stock totals $62 million; the firm has $16 million in non-operating assets; and it has 23 million shares of common stock outstanding.

a. What is the present value of the free cash flows projected during the next 4 years? Do not round intermediate calculations

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Answer #1

Compute the present value of free cash flows projected in the next 4 years as follows: - +- - +- + $3,000,000 $7,000,000 $9,0Compute the market value of firms operations as follows: Market value of operations = PV of first 4 cash flows + PV of horizCompute the price per share as follows: Total market value of equity Price per share =- Shares oustanding Total market value

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