Question

please solve

File Data Load Test Acrobat Team Home insert Page Layout Formulas 10 SAA BIU - 28-0. A = Review View Help 2 Wrap Text Merge Center - Accounting = $ - % 9 58- Conditional Formatting Clipboard Font Alignment Number G29 Selected data for the Derby Corporation are shown below. Use the data to answer the following questions 4 INPUTS (In millions) Year Proiected Current 3200 5200 5800 7 Free cash flow 8 Marketable Securities $40 9 Notes payable $100 10 Long-term bonds $300 11 Preferred stock $50 12 WACC 9.00% 13 Number of shares of stock 14 15 a. Calculate the estimated horizon value (l.e., the value of operations at the end of the forecast period 16 immediately after the Year 4 free cash flow). Assume FCFs grow constantly after year. 17 Current Projected 19 20 Free cash flow $20.0 $20.0 $80.0 S84.0 21 Long term constant growth in FCF 22 Horizon value 23 24 b. Calculate the present value of the horizon value, the present value of the free cash flows, and the 25 estimated Year.O value of operations. 27 PV of horizon value 28 PV of FCF 29 Value of operations (PV of FCF - HV) 30 31 c. Calculate the estimated Year 0 price per share of common equity 33 Value of operations 34 Plus value of narketable securities 35 Total value of company 36 Less value of debt 37 Less value of preferred stock 38 Estimated value of common equity 39 Divided by number of shares 40 Price per share 41 1 2 Ready о на е Start a web search ER

Answer 1

Hi,

Below is the solution provided. Where ever formula is used it is given next to calculation.

Inputs( In Millions)	Year
	Current	Projected
	0	1	2	3	4
Free Cash Flow		-$20.00	$20.00	$80.00	$84.00
Discount factor		$0.92	$0.84	$0.77	$0.71			Discount Factor	1/(1+WACC)^(n)
Discounted Free Cash Flow	0	-$18.35	$16.83	$61.77	$59.51			n	Time period
Marketable Securities	$40.00
Notes Payable	$100.00
Long-term Bond	$300.00
Preferred Stock	$50.00
WACC	9%							WACC	Discount Rate
Number of shares of stock	40
	Current	Projected
	0	1	2	3	4
Free Cash Flow		-$20.00	$20.00	$80.00	$84.00
Long-term constant growth in FCF (g)					0.05	or	5%	Growth Rate (g)	(4th period free cash flow -3rd year free cash flow )/3rd year free cash flow
Horizon value		$2,205.00						((Future cash flow at year 4*(1+g))/(WACC-g))
PV of Horizon value		$1,562.08						((Future cash flow at year 4*(1+g))/(WACC-g))*4th period discuont rate
PV of FCF		119.7674						Sum of discounted free cash flow from period 1 to 4
Value of operations		PV of FCF + PV of Horizon Value
		$1,681.84
Value of operation	$1,681.84
Value of Marketable securities	$40.00
Total value of company		$1,721.84
Notes Payable	$100.00
Long-term Bond	$300.00
Less Debt		$1,321.84
Preferred Stock	50
Less value of preferred stock		$1,271.84
Estimated value of common equity		$1,271.84
Number of shares of stock	40
Price per share		$31.80

Below is also given my working sheet along with the formulas visible in the excel cells.

Inputs( In Millions)	Year
	Current	Projected
	0	1	2	3	4
Free Cash Flow		-20	20	80	84
Discount factor		=1/(1+B11)	=C5^2	=C5^3	=C5^4			Discount Factor	1/(1+WACC)^(n)
Discounted Free Cash Flow	0	=C4*C5	=D4*D5	=E4*E5	=F4*F5			n	Time period
Marketable Securities	40
Notes Payable	100
Long-term Bond	300
Preferred Stock	50
WACC	0.09							WACC	Discount Rate
Number of shares of stock	40
	Current	Projected
	0	1	2	3	4
Free Cash Flow		-20	20	80	84
Long-term constant growth in FCF (g)					=((84-80)/80)	or	0.05	Growth Rate (g)	(4th period free cash flow -3rd year free cash flow )/3rd year free cash flow
Horizon value		=((F4*(1+F18))/(0.09-F18))						((Future cash flow at year 4*(1+g))/(WACC-g))
PV of Horizon value		=C19*F5						((Future cash flow at year 4*(1+g))/(WACC-g))*4th period discuont rate
PV of FCF		=SUM(B6:F6)						Sum of discounted free cash flow from period 1 to 4
Value of operations		PV of FCF + PV of Horizon Value
		=C21+C20
Value of operation	=C24
Value of Marketable securities	=B7
Total value of company		=B27+B26
Notes Payable	100
Long-term Bond	300
Less Debt		=C28-B30-B29
Preferred Stock	50
Less value of preferred stock		=C31-B32
Estimated value of common equity		=C33
Number of shares of stock	40
Price per share		=C34/B35