Question

Your company is evaluating a purchase of Skeksis Crystal Mining LLC. Skekis produced free cash flow of $7.3m last year, and this is expected to grow at 11% for the next five years before leveling off to a long term growth rate of 2%. Your company has a cost of capital of 10%, while Skeksis has a cost of capital of 13%. Skeksis has 3 million shares outstanding and $25m in debt. What would be the highest price you would pay per share of Skeksis’ stock? Please show ALL work don't compute on excel please!

Answer 1

	WACC=	10.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	7.3	11.00%	8.103		8.103	1.1	7.3664
2	8.103	11.00%	8.99433		8.99433	1.21	7.43333
3	8.99433	11.00%	9.9837063		9.9837063	1.331	7.50091
4	9.9837063	11.00%	11.08191399		11.08191399	1.4641	7.5691
5	11.08191399	11.00%	12.30092453	156.837	169.1379245	1.61051	105.02134
	Long term growth rate (given)=	2.00%			Value of Enterprise =	Sum of discounted value =	134.89

Alternatively: value of enterprise = 7.3*(1+0.11)/(1+0.1)+7.3*((1+0.11)/(1+0.1))^2+7.3*((1+0.11)/(1+0.1))^3+7.3*((1+0.11)/(1+0.1))^4+7.3*((1+0.11)/(1+0.1))^5+7.3*(1+0.11)^5*(1+0.02)/(0.1-0.02)/(1+0.1)^5 = 134.89

Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Enterprise value = Equity value+ MV of debt

134.89 = Equity value+25

Equity value = 109.89

share price = equity value/number of shares

share price = 109.89/3

share price = 36.63