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Corporate Valuation - Dozier Corporation

Question: Dozier Corporation is a fast-growing supplier of office products. Analysis project the following free cash flows (FCS) during the next 3 years after which FCF is expected to grow at a constant 7 percent rate. Dozier's cost of capital is WACC = 13%

Time 1 2 3

Free Cash Flow -$20 $30 $40
($millions)

a. What is Dozier's terminal, or horizon, value? (Hint: Find the value of all the free cash flows beyond year 3, discounted back to year 3)
b. What is the current value of operations for Doziers?
c. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and $10 million in shares of stock. What is the price per share?

Solution Preview

a. What is Dozier's terminal, or horizon, value? (Hint: Find the value of all the free cash flows beyond year 3, discounted back to year 3)

P3 = FCF4/ (r-g)
FCF3 = 40
FCF for the next year = FCF4 = 42.80 =(1+7.%) *40
WACC = r =13%
Growth rate of dividends/earnings = g = 7%
Value at the end of 3 years = P3 ...

Solution Summary

The solution shows how to calculate a firm's horizontal and terminal values as well as price per share and current operations value for a firm. Calculations are displayed in an attached Excel spreadsheet.

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