Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the demand for motor homes. The company expects free cash flow to grow at a rate of 20% for the next 4 years, after which there will be no growth (g = 0) in FCFF. The company’s last FCFF, FCFF0, was $1.50. The firm is consisted of 100% equity and has no debt. MHI’s beta is 1.5, the market risk premium is 6%, and the risk-free rate is 4%. Given there’s no debt, what is the current equity value of the firm using DCF model?
Here the valuation of equity is based on the concept of H-model , detailed as
P0 = Intrinsic value of share
D0= FCFF of Current year = 1.50
ga = Growth rate of FCFF at aggressive =20%
gn= Growth rate of FCFF at normalize rate =0%
H = n/2 = 4/2 = 2 years
K= Expected rate of return , (calculated by CAPM , K = risk free+Beta*Market risk premium)
K = 4%+ 1.5*6%=13%
P0
= $ 16.154
Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the...
Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the demand for motor homes. The company expects free cash flow to grow at a rate of 20% for the next 4 years, after which there will be no growth (g = 0) in FCFF. The company’s last FCFF, FCFF0, was $1.50. The firm is consisted of 100% equity and has no debt. MHI’s beta is 1.5, the market risk premium is 6%, and the...
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