Assume that today is Dec 31,2012. Managers at Nabor have decided to make their o

Question

Assume that today is Dec 31,2012. Managers at Nabor have decided to make their own estimate of the firms current stock value, The firms CFO has gathered data for performing the valusation using the free cash flow valuation model.

The firms weighted average cost of capital is 12% and it has $2,420,000 of debt at market value and $480,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years 2013 thru 2017 are:

Beyond 2017 to infinity the firm expects its free cash flow to grow by 6% annually.

a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.

b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value

c. If the number of shares of common stock outstanding is 200,000 what is the estimated value per share?

Year (t) Free Cash Flow (FCF) 2013 $210,000 2014 $250,000 2015 $300,000 2016 $340,000 2017 $380,000

Explanation / Answer

a) Statement Showing Present Value Of Estimated Cash Flows

=380000/0.06

=6333333

Value of firm = $4625564

b) Value of Common Stock = Value Of Firm- Value Of Debt -Value of Pref Stock

                                        = $4625564 - $2420000 - $480000

                                       = $1725564

c) If number of stock outstanding is 200000 then

Estimated Value per share = $1725564/200000 = $ 8.63 per share

Year(t) Free Cash Flow (FCF) discount factor for $1 Present Value 9in $) 2013 210000 0.8929 187509 2014 250000 0.7972 199300 2015 300000 0.7118 213540 2016 340000 0.6355 216070 2017 380000 0.5674 215612 '17 onwards

=380000/0.06

=6333333

0.5674 3593533 Total PV 4625564

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