Question

Problem 7-18 Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFS) during the next 3 years, after which FCF is expected to grow at a constant 8% rate. Dozier's weighted average cost of capital is WACC – 16%. Year 1 2 3 Free cash flow ($ millions) -$20 $30 $40 a. What is Dozier's horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. $ 540 million b. What is the current value of operations for Dozier? Do not round intermediate calculations. Round your answer to two decimal places. million c. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

a.

Horizon Value = 40(1.08)/(0.16 - 0.08)

Horizon Value = $540 million

b.

Value of Operations = -20/(1.16) + 30/(1.16)² + (540 + 40)/(1.16)³

Value of Operations = $376.63 million

c.

Intrinsic Value per Share = (376.63 - 10 - 100)/10

Intrinsic Value per Share = $26.66