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Terminal value and discount back to the present

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On January 1, 2004, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt of $300 million. After building an earnings model for Company X, you have projected free cash flow for each year through 2010 as follows:

Year 2004 2005 2006 2007 2008 2009 2010
Free Cash Flow 110 120 150 170 200 250 280

You estimate that the weighted average cost of capital (WACC) for Company X is 10% and assume that free cash flows grow in perpetuity at 3.0% annually beyond 2010, the final projected year.

Calculate the terminal value and discount back to the present:

1. $1,922.0 million
2. $1,979.7 million
3. $2,114.2 million
4. $4,120.0 million

Please select only 1 option out of the 4 options listed above.

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TERMINAL VALUE AND DISCOUNT BACK TO THE PRESENT
On January 1, 2004, shares of Company X trade at $6.50 per share, with 400 million shares outstanding. The company has net debt of $300 million. After building an ...

Solution Summary

The terminal value and discount back to the present are determined. The expert estimates the weighted average cost of capital for a Company X.

$2.19
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Brook's Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively, and after the second year it is expected to grow at a constant rate of 8%. The company's weighted average cost of capital is WACC= 12%

a) What is the terminal, or horizontal, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2)
b) Calculate the value of Brook's operations.

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 7% rate. Dozier's cost of capital is WACC=13%

Time 1 2 3
Free Cash Flow -$20 $30 $40

a) What is Dozier's terminal, or horizontal value?
b) What is the current value of operations for Dozier?
c) Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the price per share?

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