Question

Consider the case of Red Rabbit Builders: Red Rabbit Builders is expected to generate a free cash flow (FCF) of $1,225,000 this year, and the FCF is expected to grow at a rate of 18% over the following two years (FCF2 and FCF3). After the third year, however, the company's FCFs are expected to grow at a constant rate of 8% per year, which will last forever (FCF4-6). If Red Rabbit's weighted average cost of capital (WACC) is 16%, complete the following table and compute the current value of Red Rabbit's operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFS occur at the end of each year. Year PV(FCF) FCF $1,225,000 FOF2 FCF FCF Horizon Values Red Rabbit's debt has a market value of $13,481,507, and Red Rabbit has no preferred stock in its capital structure. If Red Rabbit has 500,000 shares of common stock outstanding, then the total value of the company's common equity is , and the estimated intrinsic value per share of its common stock is per share.

Answer 1

AF7 N R fic OP Year CF FCF1 $ 1,225,000 FCF 2 $ 1,445,500 FCF 3 $ 1,705,690 FCF4 $ 1,842,145 Horizon Value $23,026,815 Value P V (FCF) $ 1,056,034 $ 1,074,242 $ 1,092,763 BECO vann $14,752,306 $ 17,975,346

Alignment 19 Number Clipboard AF7 N Font fac Q R o Year FCF 1 FCF 2 FCF 3 FCF4 Horizon Value PV (FCF) =P2/1.16 =P3/(1.1642) =P4/(1.1643) 1225000 =P2*1.18 =P3*1.18 =P4*1.08 =P5/(16%-8%) Value =P6/(1.1643) =SUM(Q2:26)

2. Company's Common Equity = Total Value - Debt = $17975346 - 13481507 = $4493839

Intrinsic value per share = Common Stock Value / Shares = $4493839 / 500000 = $8.99