Question

Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandty does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $3 million, $6 million, $8 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 3%. Brandtly's WACC is 9%, the market value of its debts and preferred stock totals $75 million, the firm has $15 million in non operating assets; and it has 7.5 million shares of common stock outstanding.

a. what is the present value of free cash flows projected during the next 4 years?

b. what is the market value of the company's operations? What is the firm's total market value today?

Answer 1

Brandtty Industries 9 Present value of free cash flow projected during next 4 years. Year Pr@ 9% 1 2.75 & inmillion FCF 3 6 8 16 2 3 4 5.05 6.17 11:33 25-30 value of Form 4th = FCFF Kerg 16/1.03 0.09 -0.03 274.67 Tatal value of firm (Market value) today 2 Value of from yt (i+KC) 274.67 2 194.58 million * аты та Kc = WACC

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