Question

Consider the case of Merry Meerkat Marketing Inc.: Merry Meerkat Marketing Inc. is expected to generate a free cash flow (FCF) of $890,000 this year, and the FCF is expected to grow at a rate of 16% over the following two years (FCF2 and FCF3). After the third year, however, the company's FCFs are expected to grow at a constant rate of 7% per year, which will last forever (FCF4-co). If Merry Meerkat's weighted average cost of capital (WACC) is 14%, complete the following table and compute the current value of Merry Meerkat's operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year. PV(FCF) CF $890,000 Year FCF FCF2 FCF3 FCF Horizon Valued- Merry Meerkat's debt has a market value of $11,054,562, and Merry Meerkat has no preferred stock in its capital structure. If Merry Meerkat has 450,000 shares of common stock outstanding, then the total value of the company's common equity is , and the estimated intrinsic value per share of its common stock is per share. Assume the following: • The end of Year 3 differentiates Merry Meerkat's short-term and long-term FCFs. • Professionally-conducted studies have shown that more than 80% of the average company's share price is attributable to long-term-rather than short-term-cash flows. Is the percentage of Merry Meerkat's expected long-term cash flows consistent with the value cited in the

Answer 1

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| 0 = a = 3 3 4 5 ? v u 1x 01:24 E ENG 05-02-20208 EW179 . fix ER X ES ET EU EV EW E X EY E Z A 157 158 DISCOUNTED AT WACC PV (FCFt) 890000/(1+0.14) 1 1032400/(1+0.14)^2 1197584/(1+0.14)^3 167 0 169 170 12355979/(1+0.14)^3 EXPLANATIONS YEAR CFt PV(FCFt) CFt FCF1 890000 780702 890000 FCF2 1032400 794398 (=ET166 1.16] 168 FCF3 1197584 808335 (=ET167*1.16] FCF4 1281415 (=ET168*1.07] HORIZON VALUE 18305926.86 12355979 (=ET140/(0.14-0.07] 171 Vop = 14739414 172 LESS: DEBT 11054562 173 answer VALUE OF COMMON EQUITY 3684852 174 answer INTRINSIC VALUE PER SHARE 8.19 (3684852/450000] 175 176 answer yes, because 83.83% of the firm's share price is derived from its expected long term free cash flows 177 % of long term cash flow = 83.83% (12355979/14739414 178 179 180 NPV OCF CASH FLOW STATW FCF ARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER GM HPRAM TAX [FCF4/(WACC-g)] HEDGING MONEY MARKET GRO... →