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Ch07 P2 Build A Model

1) The document provides financial data for Derby Corporation over a 4 year period including free cash flows, marketable securities, notes payable, long-term bonds, preferred stock, and weighted average cost of capital (WACC). 2) It asks to calculate the horizon value assuming long-term constant growth of 5% after year 3, present value of horizon value and free cash flows, and estimated year-0 value of operations. 3) The estimated year-0 price per share of common equity is then calculated using the value of operations, marketable securities, total value, debt, preferred stock, and number of shares.

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Qudsiya Kalhoro
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74 views3 pages

Ch07 P2 Build A Model

1) The document provides financial data for Derby Corporation over a 4 year period including free cash flows, marketable securities, notes payable, long-term bonds, preferred stock, and weighted average cost of capital (WACC). 2) It asks to calculate the horizon value assuming long-term constant growth of 5% after year 3, present value of horizon value and free cash flows, and estimated year-0 value of operations. 3) The estimated year-0 price per share of common equity is then calculated using the value of operations, marketable securities, total value, debt, preferred stock, and number of shares.

Uploaded by

Qudsiya Kalhoro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter: 7 Valuation of Stocks and Corporations

Problem 2

Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

INPUTS (In millions) Year


Current Projected
0 1 2 3 4
Free cash flow -$20.0 $20.0 $80.0 $84.0
Marketable Securities $40
Notes payable $100
Long-term bonds $300
Preferred stock $50
WACC 9.00%
Number of shares of stock 40

a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period
immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.

Current Projected
0 1 2 3 4
Free cash flow -$20.0 $20.0 $80.0 $84.0
Long-term constant growth in FCF 5.0%
Horizon value $2,205.00

b. Calculate the present value of the horizon value, the present value of the free cash flows, and the
estimated Year-0 value of operations.

PV of horizon value $1,562.08 (18.3) 16.8 61.8 59.5 119.8 $1,681.84


PV of FCF $ 119.77
Value of operations (PV of FCF + HV) $1,681.84

c. Calculate the estimated Year-0 price per share of common equity.

Value of operations $1,681.84


Plus value of marketable securities $40.00
Total value of company $1,721.84
Less value of debt $400.00
Less value of preferred stock $50.00
Estimated value of common equity $1,271.84
Divided by number of shares $40.00
Price per share $31.80
SELF-TEST PROBLEMS
Value of operations $2,675,000.00
(ST-3) Plus value of marketable securities $325,000.00
FCF $100,000 Total value of company $3,000,000.00
gl 7% Less value of debt $1,000,000.00
WACC 11% Less value of preferred stock $0.00
Marketable securities $325,000 Estimated value of common equity $2,000,000.00
Debt $1,000,000 Divided by number of shares 50000
Shares # 50000 Price per share $40.00

a. Value of operations
Vop = FCF(1+g)/WACC-g
$2,675,000

b. Total value = Value of operation + Value of non operating assets


$2,675,000 $325,000
= $3,000,000

c. Value of Equity = Total Value - Value of debt


$3,000,000 $1,000,000
= $2,000,000

d. Price per share = Value of equity = $40


Number of shares

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