Question

1.A. What's the FCFF of a company with total revenues of $900 million, operating profit margin of 25%, tax rate of 35% and reinvestment rate of 20%? Answer in millions, rounded to one decimal place.

1.B. You are valuing a company with free cash flows expected to grow at a stable 1.5% rate in perpetuity. Analysts are forecasting free cash flows of $50 million for next year (FCFF1). The company has $40 million of debt and $5 million of cash. Cost of capital is 14.0%. There are 10 million shares outstanding. How much is each share worth according to your valuation? Round to one decimal place.

Answer 1

1A)

FCFF = NOPAT - Reinvestment

NOPAT = Total revenue * operating profit margin * (1 - tax rate)
= $900 million * 25% * (1 - 0.35)
= $146.25 million

FCFF = $146.25 million - ($146.25 million * 20%)
= $146.25 million - $29.25 milllion
= $117 million

FCFF = $117 million

1B)

Value of firm = FCFF1 / (cost of capital - growth rate)
= $50 million / (0.14 - 0.015)
= $400 million

Value of Equity = Value of Firm - Value of Debt + Cash & Cash Equivalent
= $400 million - $40 million + $5 million
= $365 million

Value per Share = Value of Equity / no of outstanding shares
= $365 million / 10 million
= $36.5

Value per share = $36.5