Corporate valuationDollars/shares in millionsFCFFCF2-$19.00$26.00FCF3$35.00Constant growth rate, gn8.00%WACC11.00%Market value of debt$181.00Common shares outstanding3101234FCFS$2.00-$19.00$26.00$35.00Horizon valueTotal FCFSPV of FCFS to investorsFirm value todayMarket value of equity, MVEuityPrice per share, PọFormulas0134FCFS$35.00-$19.00$26.00#N/AHorizon value#N/A#N/A.#N/A#N/ATotal FCFS#N/APV of FCFS to investors#N/A#N/AFirm value today#N/AMarket value of equity, MVEquity#N/APrice per share, Po#N/A.

Question
Asked Nov 21, 2019
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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 8% rate. Dantzler's WACC is 11%.

Year 0 1 2 3
....... ....... ....... ....... .......
FCF ($ millions) ....... ....... ....... .......
    -$19 $26 $35

a. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

b. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.

c. Suppose Dantzler has $181 million of debt and 31 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

 

Corporate valuation
Dollars/shares in millions
FCF
FCF2
-$19.00
$26.00
FCF3
$35.00
Constant growth rate, gn
8.00%
WACC
11.00%
Market value of debt
$181.00
Common shares outstanding
31
0
1
2
3
4
FCFS
$2.00
-$19.00
$26.00
$35.00
Horizon value
Total FCFS
PV of FCFS to investors
Firm value today
Market value of equity, MVEuity
Price per share, Pọ
Formulas
0
1
3
4
FCFS
$35.00
-$19.00
$26.00
#N/A
Horizon value
#N/A
#N/A.
#N/A
#N/A
Total FCFS
#N/A
PV of FCFS to investors
#N/A
#N/A
Firm value today
#N/A
Market value of equity, MVEquity
#N/A
Price per share, Po
#N/A.
help_outline

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Corporate valuation Dollars/shares in millions FCF FCF2 -$19.00 $26.00 FCF3 $35.00 Constant growth rate, gn 8.00% WACC 11.00% Market value of debt $181.00 Common shares outstanding 31 0 1 2 3 4 FCFS $2.00 -$19.00 $26.00 $35.00 Horizon value Total FCFS PV of FCFS to investors Firm value today Market value of equity, MVEuity Price per share, Pọ Formulas 0 1 3 4 FCFS $35.00 -$19.00 $26.00 #N/A Horizon value #N/A #N/A. #N/A #N/A Total FCFS #N/A PV of FCFS to investors #N/A #N/A Firm value today #N/A Market value of equity, MVEquity #N/A Price per share, Po #N/A.

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Expert Answer

Step 1

a)

The below expression can be used to calculate horizon value:

(1+g)
WACC-g
Horizon value Free cash flow in year 3 x
Here
g is growth rate.
WACC is weighted average cost of capital
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(1+g) WACC-g Horizon value Free cash flow in year 3 x Here g is growth rate. WACC is weighted average cost of capital

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Step 2

Substitute $35 million for free cash flow in year 3, 8% for g and 11% for WACC in the above formula,

(1+8%)
Horizon value $35 million:
11%-8%
(1.08)
=$35 million x
0.03
= $35 million x36
= $1,260 million
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(1+8%) Horizon value $35 million: 11%-8% (1.08) =$35 million x 0.03 = $35 million x36 = $1,260 million

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Step 3

b.

The firm value can be calculated with ...

1st year cash inflow
(1+WACC)
2nd year cash inflow
(1+WACC)
Firm value
3rd year cash inflow
(1+WACC)
Firm horizon value at year 3
(1+WACC)
3
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1st year cash inflow (1+WACC) 2nd year cash inflow (1+WACC) Firm value 3rd year cash inflow (1+WACC) Firm horizon value at year 3 (1+WACC) 3

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