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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

CORPORATE VALUATION Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earning s. In other words, Brandtly 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 Brandtly’s stock. The pension fund manager has estimated Brandtly’s free cash flows for the next 4 years as follows: $3 million. $6 million, $8 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 3%.

Brandtly’s WACC is 9%, the market value of its debt and preferred stock totals $75 million; and it has 7.5 million shares of common stock outstanding.

  1. a. What is the present value of the free cash flows projected during the next 4 years?
  2. b. What is the firm’s horizon, or continuing, value?
  3. c. What is the firm’s total value today?
  4. d. What is an estimate of Brandtly’s price per share?

a.

Summary Introduction

To identify: The net present value of cash flows.

Introduction:

Net Present Value:

It is that amount which indicates the difference reported on subtraction of the cash outflows from the cash inflows.

Explanation

Given information:

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 $8 million.

The cash flow for the fourth year is $16 million.

The interest rate or weighted average cost of capital (WACC) is 9%.

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 for the first year.
  • CF2 is the cash flow of the second year
  • CFn is cash flow for the last year

Substitute $3,000,000 for CF1 , $6,000,000 for CF2 , $8,000,000 for CF3 , 16,000,000 for CF4 , 0.09 for r.

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

b.

Summary Introduction

To identify: The horizon value of the firm.

c.

Summary Introduction

To identify The total value of the firm.

d.

Summary Introduction

To identify: The price per share.

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