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# Free Cash Flow, Value of Operations, and Value of Share

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A company generated free cash flow of \$51 million last year and expects it to grow at a constant rate of 4% indefinitely. The company's weighted average cost of capital is 12%. The company has 25 million shares of outstanding stock, and the current price per share is \$28.50.

Could you please do a step-by step (equation) process for each problem for learning purposes.

Calculate the company's free cash flow for next year.

Calculate the value of the company's operations.

Calculate the value of one share of the company's stock.

Is the company's stock a good buy? Explain?

#### Solution Preview

Calculate the company's free cash flow for next year.

We are given that the free cash flows (FCF) are growing at a constant rate of 4%. This implies that the FCF would increase by 4% each year. We are given the current FCF. The FCF next year would be higher by 4%
Next year FCF (FCF 1) = Current FCF (FCF0) X (1+ rate)
FCF1 = 51 X (1+4%) = \$53.04 million

Calculate the value of the ...

#### Solution Summary

The solution explains the calculation of free cash flow, value of operations and the value of share of stock

\$2.19

## Hast acquiring Van: free cash flow, value of operations, per share value, bid price

Hast is interested in acquiring Van. Van has 1 million shares outstanding and a target capital structure consisting of 30% debt. Van's debt interest is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Hast and Van face a 40% tax rate.

Could you show me step by step showing all calculation in black font with my attached Excel spreadsheet?

1. Van's free cash flow (FCF o) is \$ 2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4.

What is the value of Van's operations?

If Van has \$10.82 million in debt, what is the current value of Van's stock? (Use the corporation valuation model)

2. Hast estimates that if it acquires Van, interest payments will be \$1,500,000 per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be \$1.472 million, after which interest and the tax shield will grow at 5%.

Synergies will cause the free cash flows to be \$2.5 million,
\$2.9 million, \$3.4 million, and then \$3.57 million, in Years 1 through 4, after which the free cash flows will grow at a 5% rate.

What is the unlevered value of Van and what is the value of its tax shields?

What is the per share value of Van and Hast Corporation? Assume Van now has \$10.82 million in debt.

3. On the basis of the data answers for the above 1 and 2, if Hast were to acquire Van, what would be the range of possible prices that it could bid for each share of Van common stock?

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