   Chapter 9, Problem 19P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

CORPORATE VALUATION Barrett Industries Invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words. Barrett 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 Barrett’s stock. The pension fund manager has estimated Barrett’s free cash flows for the next 4 years as follows: $3 million.$6 million, $10 million, and$15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barrett’s WACC is 12%, the market value of its debt and preferred stock totals $60 million, and it has 10 million shares of common stock outstanding. a. What is the present value of the free cash flows protected during the next 4 years? b. What is the firm’s horizon, or continuing, value? c. What b the firm’s total value today? d. What is an estimate of Barrett’s price per share? a. Summary Introduction To identify: The net present value of cash flows. Net Present Value: It is that amount which indicates the difference reported on subtraction of the cash outflows from the cash inflows. To identify: The net present value of cash flows. Explanation Given, The cash flow for the first year is$3 million.

The cash flow for the second year is $6 million. The cash flow for the third year is$10 million.

The cash flow for the fourth year is $15 million. The interest rate or weighted average cost of capital (WACC) is 12%. Formula to calculate the net present value, NPV=CF0+CF1(1+r)1+CF2(1+r)2+...+CFn(1+r)n Where, • NPV is net present value. • CF0 is cash flow of the initial year. • CF1 is cash flow of the first year. • CF2 is the cash flow of second year. • CFn is cash flow for the last year. Substitute$3,000,000 for CF1, $6,000,000 for CF2,$10,000,000 for CF3, 15,000,000 for CF4, 0.12 for r.

NPV=\$3,000,000(1+0

b.

Summary Introduction

To identify: The horizon value of firm.

c.

Summary Introduction

To identify: The total value of the firm.

Summary Introduction

To identify: The price per share.

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