Question

4) (3 pts) Assume that Company D's Free Cash Flow from assets has been estimated to be $80 million in 2020 and $90 million in 2021. The free cash flow is expected to grow at a constant rate of 5% after 2021. a) If the appropriate discount rate for Company D's FCF model is 7.7%, what is the horizon value at the end of 2021 for Company D using the Free Cash Flow Model? 2019 2020 2021 FCF $80 m $90 m Horizon Value b) What is the intrinsic Value today (beginning of 2020 aka end of 2019) of Co.D's Assets? Intrinsic Value = c) If Company D has no meaningful debt then Assets = Equity and the intrinsic Value of the Assets would equal the intrinsic Value of Equity. If the firm has 45 million shares outstanding, what would be the intrinsic value per share of stock today according the estimates given for Company D? Intrinsic Value per share =

Answer 1

4 a)

t=0, beginning of 2020 (end of 2019)

t=1, end of 2020

t=2, end of 2021

Horizon value is to be calculated at end of year 2021 ie.. t=2

Horizon value at end of 2nd year in case of constant growth is calculated as

V2= C3/(r-g)

where C3= cashflow in  3rd year =C2*(1+g)

r= required rate/discount rate

g=growth rate

So, V2 = 90*1.05/(0.077-0.05) = 3500

Horizon value at the end of 2021 is $3500 million

b) Intrinsic value today is sum of present value of all cash flows and horizon value

So, intrinsic Value = 80/1.077+90/1.077^2+3500/1.077^2 =3169.29743114

= $3169.30 million

c) Intrinsic value per share = Total Intrinsic value/ no. of shares

= $ 3169.29743114 million/ 45 million

=70.4288318 or

$70.43

Intrinsic value per share =$70.43