Question

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows(FCFs) during the next 4 years, after which FCF is expected to grow at a constant 8% rate. Dozier's weighted average cost of capital is WACC = 17%.

Year Free cash flow($ millions)
1 -$400
2 $500
3 $700

4 $900

Suppose Dozier has $500 million in marketable securities, $1,500 million in debt, and 80 million shares of stock. What is the intrinsic price per share?

A) $43.79

B) $71.30

C) $68.54

D) $57.04

Answer 1

Value of Operations = -400/(1.17) + 500/(1.17)² + 700/(1.17)³ + 900/(1.17)⁴ + 900(1.08)/(0.17 - 0.08)(1.17)⁴

Value of Operations = $6,704.14

Intrinsic Value = (6,704.14 - 500 - 1,500)/80

Intrinsic Value = $57.04