Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 7, Problem 25SP
Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions.
- a. Calculate the estimated horizon value (i.e., the value of operations at the end of the
forecast period immediately after the Year-4free cash flow ). Assume growth becomes constant after Year 3. - b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations.
- c. Calculate the estimated Year-0 price per share of common equity.
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Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions.a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. c. Calculate the estimated Year-0 price per share of common equity. INPUTS (In Millions) YearCurrent Projected0 1 2 3 4Free cash flow −$20.0 $20.0 $80.0 $84.0Marketable securities $40Notes payable $100Long-term bonds $300Preferred stock $50WACC 9.00%Number of shares of stock 40
You will apply the concepts of company valuation that you have just learned to determine whether company XYZ is overvalued.
We are currently at the end of the year "t". You performed a thorough financial analysis of XYZ and forecast the following Free Cash Flows (FCF):
Year t+1: 352 million USDYear t+2: 385 million USDYear t+3: 407 million USDFrom year t+3 onward, you expect the FCFs to grow at a constant yearly rate of 4%.
Through your analysis, you also determined that the appropriate Weighted Average Cost of Capital (WACC) for XYZ was 11%.
Finally, you know that XYZ has 1000 million USD in debt and 100 million shares outstanding.
a firm wants to start a project. a team of financial analysts estimated the following cash flows.
Years
Cash Flow
0
-$100000
1
55000
2
43000
3
45000
suppose that the discount rate (interest rate) is 12%, the NPV will be?
Chapter 7 Solutions
Financial Management: Theory & Practice
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