Question

Consider the data below valuation of your company using the free cash flow valuation model. The company's weighted average cost of capital is 12% and it has R1 400 000 of debt at market value and R500 000 of preferred shares at its assumed market value.
The estimated free cashflows over the next five years 2014 through 2018 are given below. Beyond 2018 to infinity the company expects its free cash flow to grow by 4% annually.
yr2014 R250 000, yr2015 R290 000, yr2016 R320 000, yr2017 R360 000, yr2018 R400 000.
Required:
1.1 Estimate the value of your company using the free cash flow appproach.
1.2 Use your findings in part 1.1 along with the data provided above to find the company's common share value.
1.3 If the company plans to issue 220 000 shares of common shares what is the estimated value per share?

Question 1 15 Marks Consider the data below to perform valuation for your company wsing the free cash flow van model The company's weighted average cost of capital is 12% and it has R1,100,000 of debt at market value and R500,000 of preferred shares at its assumed market value. The estimated free cash flows over the next five years, 2014 through 2018, are given below. Beyond 2018 to infinity, the company expects its free cash flow to grow by A l ly Year (0) 2014 2015 2016 2017 2018 Free cash flow (FCF) R250,000 290.000 320,000 360,000 400.000 0000-500 6820000- Required: =492oooo.. 1.1. Estimate the value of your company's entire company using the free cash flow approach. 1.2. Use your findings in part (1.1), along with the data provided above, to find the company's 9700 common share value. 1.3. If the company plans to issue 220,000 shares of common shares, what is the estimated value per - Saou share? harooool220000 =122, 3b Per

please no excel answer

Answer 1

(1.1) Weighted Average Cost of Capital (WACC) = 12 %, Perpetual Growth Rate = 4%.

Cash Flows: 2014 FCF = R250000, 2015 FCF = R290000, 2016 FCF = R320000, 2017 FCF = R 360000, 2018 FCF = R 400000,

Expected 2019 FCF = 400000 x 1.04 = R 416000

Total Present Value of Initial FCFs = 250000 / (1.12) + [290000 / (1.12)^(2)] + [320000 / (1.12)^(3)] + [360000 / (1.12)^(4)] + [400000 / (1.12)^(5)] = R 1137927.44

Horizon Value of FCFs = 2019 FCF / (WACC - Perpetual Growth Rate) = 416000 / (0.12 - 0.04) = R 5200000

Total Firm Value = 1137927.44 + 5200000 = R 6337927.44

(1.2) Market Value of Debt = R 1400000 and Market Value of Preferred Shares = R500000

Market Value of Equity = 6337927.44 - 1400000 - 500000 = R 4437927.44

(1.3) Number of Common Shares to be Issued = 220000

Therefore, Price per Share = 4437927.44 / 220000 = R 20.172397 ~ R 20.17