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Free Cash Flow ValuationDozier 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 5% rate. Dozier's weighted average cost of capital is WACC = 14%. Year 123Free cash flow ($ millions)-$20$30$40  What is Dozier's horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places.$ millionWhat is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places.$ millionSuppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent.$

Question

Free Cash Flow Valuation

Dozier 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 5% rate. Dozier's weighted average cost of capital is WACC = 14%.

  Year
  1 2 3
Free cash flow ($ millions) -$20 $30 $40

 

 

  1. What is Dozier's horizon 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.

    $ million

  2. What is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places.

    $ million

  3. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent.

    $
check_circleAnswer
Step 1

The discounted cash flow method is used to determine the horizontal value, value of the firm and instrinsic value

The horizontal or terminal value is the value of the firm beyond a certain period when the growth is expected to be constant.

Step 2
value of the firm
Free Cash Flow(1+g)
1 beyond 3 years
=
WACC-g
where g -contanst growth rate
WACC=Weighted Average cost of capital
Value of the firm
40(1+5%)
(14%-5%)
beyond 3 years
42
0.09
$
467
Terminal value of the firm=Value of the firm after 3 years
So, the value of the firm beyond 3 years need to be discounted by 14%
So, terminal value
467
(1+149%)
467
1.68896016
276.30
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value of the firm Free Cash Flow(1+g) 1 beyond 3 years = WACC-g where g -contanst growth rate WACC=Weighted Average cost of capital Value of the firm 40(1+5%) (14%-5%) beyond 3 years 42 0.09 $ 467 Terminal value of the firm=Value of the firm after 3 years So, the value of the firm beyond 3 years need to be discounted by 14% So, terminal value 467 (1+149%) 467 1.68896016 276.30

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Step 3
2 Current Value of the operations
Present Value of $1
Cash flow@14%
Present Value of Cash Flow
Year
-20
1
0.877192982
-17.54385965
30
2
0.769467528
23.08402585
40
3
0.674971516
26.99886065
3 years onwards
276.30
Value of the firm
308.8431563
229
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2 Current Value of the operations Present Value of $1 Cash flow@14% Present Value of Cash Flow Year -20 1 0.877192982 -17.54385965 30 2 0.769467528 23.08402585 40 3 0.674971516 26.99886065 3 years onwards 276.30 Value of the firm 308.8431563 229

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