Dozier Corporation - Terminal value & Equity Valuation

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

Time 1 2 3
Free Cash Flows ($ millions) -$20 -$30 -$40

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

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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Solution Preview

Terminal value = FCF4/(r-g)
FCF4=Free cash flow for year 4
r=13%
g=7%
Terminal value=40*(1+0.07)/(0.13-0.07)=$713.33 ...

Solution Summary

This problem deals with the security valuation and specifically looking into the equity valuation. First, we calculate the terminal value / horizon value for Dozier Corporation. Then we estimate the value of its operation and finally we calculate the price per share. Provides mathematical formula and explanation.

$2.49