Brandtly Industries invests a large sum of money in R&D; as a result, it retains
ID: 2616869 • Letter: B
Question
Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $2 million, $7 million, $8 million, and $14 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Brandtly's WACC is 16%, the market value of its debt and preferred stock totals $78 million; and it has 13 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
a. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your intermediate calculations.
$_____
b. What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$_____
c. What is the firm's total value today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$_____
d. What is an estimate of Brandtly's price per share? Round your answer to the nearest cent. Do not round your intermediate calculations.
$_____
Explanation / Answer
a. Growth rate after the end of 4th year is 6%
Cash Inflow for 5th Year is $ 1,48,40,000 i.e. (1,40,00,000 * 1.06)
WACC is @ 16%
Value of Free Cash Flow after 4th Year =
$ 1,48,40,000 / (.16 - .06);
$ 14,84,00,000
Free Cash Flow for year 4=
$ 16,24,00,000 ( 14,84,00,000 + 14000000 )
b. Terminal or Continuing Value of The Firm = (FCFt +1) / (r-g) i.e. 14000001 / .10
i.e. $ 140000010
[ FCFt = Free Cash Flow at last year , r = Cost of Capital & g = growth rate ]
c. Total Value of the Firm today is $ 17,93,40,000
[ Firm Value = Market Capitalisation - Cash or equivalents + Debt Capital + Preferred Stock
i.e. Firm Value = ($ 101340000 + $ 78000000)
i.e. $ 17,93,40,000 ]
d. Brandtly's price per share
Market Price Per share = (Market Capitalisation Value / No.of Common Stock outsatnding)
So, MPS = $ 101340000 / 13000000
So, MPS = $ 7.80
Year FCF PV factor PV of FCF 1 2000000 0.86 1720000 2 7000000 0.74 5180000 3 8000000 0.64 5120000 4 162400000 0.55 89320000 Total PV of FCF 101340000