Question

Problem 10-6 Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. Heavy Metal Corporation is expected to generate the free cash flows in the table below over the next five years. After 5 years, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%: a. Estimate the enterprise value of Heavy Metal. * If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price. Year Free Cash Flow (million) is? 53 | 5 ? 685 978|$ * 15.5 82 Growth rate Number of periods Average cost of capital a. Estimate the enterprise value of Heavy Metal, Cash flow in year 6 (million) Value, in year 5, of the growing perpetuity (million) Enterprise value (million) If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price. Excess cash (million) Debt (million) Number of shares (million) $ $0.00 300 40 Price per share

Please help solve blue boxes.

Answer 1

	Note : Al figures in the Ans are in millions
Step 1	Enterprise value at beginning of year 5
	Using formulae for discounting costant growht earnings @ cost of capital
	Enterprise value at beginning of Year 5 =	(Free cash Flow year 5)/(Cost of Capital - Growth Rate)
		(82 / 14%-4%)
		820
Step 2	Discounting Year Wise cash flows
							Sum
	Year	1	2	3	4	5
	Free Cash Flow and EV	53	68	78	75	902
	Discounted Value Factor 1/ ((1+Cost of capital)^No of year)	0.88	0.77	0.67	0.59	0.52
	Value at Y0 (Free cash flow * Discount value factor)	46.49	52.32	52.65	44.41	468.47	664.34
	(Note : Year 5 is 820 +82) ^
	(Note : YEAR 1 disc factor is 1/1.14), Year 2 is (1/1.14^2) etc)
	Enterprise Value is sum of all Cash Flows
	Ans A = 664.34 Million$
	Entperise value	664.34
Less	Value of Debt	300
	Value for Eq SH	364.34
Divided by	No of shares (In Mill)	40
	Earning per share	9.11
	Ans B = Earning per sahre = 9.1$