Question

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFS) during the next 3 years, after which FCP s expected to grow at a constant 7% rate. Dantzler's WACC is 10% Ycar $22 FCF ($ millions) $10 $48 a. What is Dantzler's horizon, or continuinq, 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. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. million b. What is the firm's value today? Round your answer to two decimal places. Enter your answer millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations. million c. Suppose Dantzler has $75 million of debt and 6 million shares answer completely. For example, 0.00025 million should be entered as 250 stock outstanding. What your estimate of the current price per share? Round your answer to two decimal places. Write out your

Answer 1

Solution to QUESTION-1

(a)-Horizon or Continuing Value

Free cash flow in year 3 (FCF3) = $48 Million

Growth Rate (g) = 7% per year

Weighted Average Cost of capital (WACC) = 10%

Therefore, the Horizon Value = FCF3(1 + g) / (WACC – g)

= $48 Million(1 + 0.07) / (0.10 – 0.07)

= $51.36 Million / 0.03

= $1,712.00 Million

(b)-Firm’s Value Today

Firm’s Value Today is the Present Value of the free cash flows plus the present value of the Horizon Value discounted at WACC

Year	Cash flow ($ in Million)	Present Value factor at 10%	Present Value of cash flows ($ in Million)
1	-10.00	0.90909	-9.09
2	22.00	0.82645	18.18
3	48.00	0.75131	36.06
3	1,712.00	0.75131	1,286.25
TOTAL			1,331.40

The firm's value today will be $1,331.40 Million

(c)-Current Price per share

Current Price per share = [Firms Value – Debt Outstanding] / Number of stocks outstanding

= [$1,331.40 Million - $75 Million] / 6 Million shares

= $1,256.40 Million / 6 Million shares

= $209.40 per share

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

Solution to QUESTION-2

Value of Maxwell Mining’s Stock

As per Constant Growth Dividend Valuation Model, the Price of the stock is calculated as follows

The Price of the stock today = Last Year Dividend per share(1 + Growth Rate) / (Cost of Equity – Growth Rate)

= D0(1 + g) / (Ke – g)

= $6.00(1 + 0.10) / (0.15 – 0.10)

= $6.60 / 0.05

= $132.00 per share