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 14%. Year 1 2 3 FCF ($ millions) - $11 $19 $51 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.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places. million b. What is the firm's market value today? Assume that Dantzler has zero non-operating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places. million c. Suppose Dantzler has $130 million of debt and 21 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

(a): Horizon value = FCF of year 3 *(1+g)/(WACC-g)

= 51*1.08/(14%-8%)

= 918.00 million

(b): Current value = present value of FCF of years 1 to 3 + present value of horizon value

= -11/1.14 + 19/1.14^2 + 51/1.14^3 + 918/1.14^3

= $659.02 million

(c ): Value of equity = value of firm – value of debt

= $659.02 million - $130 million

= $529.02 million

Current price per share = $529.02 million/21 million shares

= $25.19