Corporate valuation Barrett Industries invests a large sum of money in R&D; as a
ID: 2776743 • Letter: C
Question
Corporate valuation
Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett 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 Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $2 million, $7 million, $9 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 3%. Barrett's WACC is 9%, the market value of its debt and preferred stock totals $72 million, and it has 24 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent.
$ {C}
What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.
$
What is the firm's total value today? Round your answer to the nearest cent.
$ {C}
What is an estimate of Barrett's price per share? Round your answer to the nearest cent.
Explanation / Answer
WACC 9% Growth 3% Year 1 2 3 4 FCF 2000000 7000000 9000000 16000000 Discounted @ 9% 1834862 5891760 6949651 11334803 Present value 2,60,11,077.04 Now we take terminal value Terminal Value = Final Projected Year Cash Flow X (1+Long-Term Cash Flow Growth Rate) (Discount Rate – Long-Term Cash Flow Growth Rate) FCF 27,46,66,666.67 Present value of TV 19,45,80,791.31 Firms value today is sum of PV of 4 years+ TV 22,05,91,868.34 Estimated share price os value of firm / no.of shares outstanding adjusted for debt and prefered stock 12,25,80,791.31 Price per stock 5.11