Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 5% rate. Dantzler's WACC is 13%.
Year | 0 | 1 | 2 | 3 | ||||
....... | ....... | ....... | ....... | ....... | ....... | ....... | ....... | |
....... | ....... | ....... | ....... | ....... | ....... | ....... | ...... | |
FCF ($ millions) | - $11 | $26 | $37 |
a. The horizon value is computed as shown below:
= [ FCF in year 3 (1 + growth rate) ] / ( WACC - growth rate)
= [ $ 37 million (1 + 0.05) ] / (0.13 - 0.05)
= $ 38.85 million / 0.08
= $ 485.63 million
b. The amount is computed as follows:
= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)2 + FCF3 / (1 + WACC)3 + 1 / (1 + WACC)3 [ ( FCF in year 3 (1 + growth rate) / (WACC - growth rate) ]
= - $ 11 million / 1.13 + $ 26 million / 1.132 + $ 37 million / 1.133 + 1 / 1.133 x [ ($ 37 million x 1.05) / (0.13 - 0.05)
= $ 372.8326416 million or $ 372.83 million Approximately
c. The current price per share is computed as follows:
= ($ 372.8326416 million - $ 22.90 million) / 11 million shares
= $ 31.81 Approximately
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