Secure | http://www.mathxlcorn/Studen Phomeworkld 460856437kquestionld-1Q 493des

Question

Secure | http://www.mathxlcorn/Studen Phomeworkld 460856437kquestionld-1Q 493des FINA2230 BUSINESS FINANCE WINTER 2017 Sarah Sedlacek | 12/20/17 4:39 PM ANCE Homework: Chapter 7 Save 4) 8of11(6 complete) Score: 0 of 1 pt P7-16 (similar to) Free cash flow valuation Nabor Industries is c Score: 45 45%, 5 of 11 pts Question Help onsidering going public but is unsure of a tair offering price for the company Betore hiring an investment banker to assist in making the public oftering, managers at Nabor have decided to make their own estmate of the frm's common stock value. The im's CFO has gathered data for pertorming the valuation using the free cash tow valuation model The firm's weighted average cost of capital is 11%, and it has S3080000 of debt at market value and $620000 of preferred stock at is assumed market value. The estmated tee cash fows over the next 5 years, 2016 through 2020, are given in he able, Beyond 2020 tinnnit·the firm expects its free cash nowto grow by 5% annually a. Esimate the value of Nabor Industries c. If the firm plans to issue 200,000 shares of common a. The value of Nabor he value of Nabor Industries' entre company by using the ree cash fow valustion mode stock, what is i's estmated value per share? Industries' entire company is S found to he nearest dollar ) Enter your answer in the answer box and then click Check Ansawer remaining Clear Al Check Answor Nat

Explanation / Answer

Free cash flow is calculated by using present values of expected future cash flows discount by weighted average cost of capital(Wacc) In the given problem, we can use Gordon model to get value of value of free cash flow from 2020 to infinity Value of FCF from 2020 to infinity = FCF for 2021/Wacc - growth rate) = 470000(1+0.05)/0.11-0.05 = 493500/0.06 = 8225000 Now we add the free cash flow for the year 2020 and value of FCF from 2020 to infinity = 8225000+470000 = 8695000 This is the value of FCF in 2020 To calculate the value of entire company Year FCF (given) PV factor @ 11% Present value A B A/B 2016 $270,000 0.901 $243,270 2017 $300,000 0.812 $243,600 2018 $340,000 0.731 $248,540 2019 $400,000 0.659 $263,600 2020 $8,695,000 0.593 $5,156,135 Value of entire company $6,155,145 b Calculation of common stock value Market Value of equity = Value of Entire company+ Cash - Market Value of Debt - Market Value of Preferred Shares = $6,155,145 - $3,080,000 - $620,000 = $        2,455,145 c If the firm plans to issue 200000 shares of common stock, then Estimated value per share would be = Market Value of Equity / No. of shares = $2,455,145/200000 = $                12.28

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