| Solution | | | | | | 7/16/15 |
| Chapter: | 7 | Valuation of Stocks and Corporations |
| Problem: | 22 |
| Selected data for the Derby Corporation are shown below. Use the data to answer the following questions. |
| INPUTS (In millions) | | Year |
| | | Current | Projected |
| | | 0 | 1 | 2 | 3 | 4 |
| Free cash flow | | | -$20.0 | $20.0 | $80.0 | $84.0 |
| Marketable Securities | | $40 |
| Notes payable | | $100 |
| Long-term bonds | | $300 |
| Preferred stock | | $50 |
| WACC | | 9.00% |
| Number of shares of stock | | 40 |
| 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. |
| | | Current | Projected |
| | | 0 | 1 | 2 | 3 | 4 |
| Free cash flow | | | -$20.0 | $20.0 | $80.0 | $84.0 |
| Long-term constant growth in FCF |
| Horizon value |
| 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. |
| PV of horizon value |
| PV of FCF |
| Value of operations (PV of FCF + HV) |
| c. Calculate the estimated Year-0 price per share of common equity. |
| Value of operations |
| Plus value of narketable securities |
| Total value of company |
| Less value of debt |
| Less value of preferred stock |
| Estimated value of common equity |
| Divided by number of shares |
| Price per share |
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Ch07P22BuildaModel.xlsx
