Question

Corporate Finance I

IDX Technology is a privately held developer of advanced security systems. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder about the possibility of acquiring the business at the end of 2008. Estimate the value of IDX per share using the discounted FCF approach and the following data:

• Debt: $30 million
• Excess cash: $110 million
• Shares outstanding: 50 million
• Expected FCF in 2009: $45 million
• Expected FCF in 2010: $50 million
• Future FCF growth rate beyond 2010: 5%
• Weighted-average cost of capital: 9.4%

Answer 1

The value of IDX per share is computed as shown below:

The enterprise value in 2009 is computed as follows:

= Expected FCF in 2010 / ( WACC - growth rate )

= $ 50 million / ( 0.094 - 0.05 )

= $ 1,136,363,636

Enterprise value in 2008 is computed as follows:

= ( $ 1,136,363,636 + $ 45,000,000 ) / 1.094

= $ 1,079,857,071

Now we shall adjust cash and debt as shown below:

= $ 1,079,857,071 + $ 110,000,000 - $ 30,000,000

= $ 1,159,857,071

Now finally we shall divide the above number by the number of shares as

= $ 1,159,857,071 / 50,000,000

= $ 23.20 per share Approximately

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