Today is 2015. Dewhurst, Inc. wishes to determine the value of its stock by usin
ID: 2783483 • Letter: T
Question
Today is 2015. Dewhurst, Inc. wishes to determine the value of its stock by using the free cash flow valuation model. The firm's CFO developed the following data: Free cash flow Year (t) 2016 2017 2018 2019 2020 (FCF) Other data $400,000 450,000 520,000 560,000 600,000 Growth rate of FCF' beyond 2020 to infinity, gFCF = 3% Weighted average cost of capital, a = 9% Market value of all debt, VD $3,100,000 Market value of preferred stock, VP $800,000 Number of shares of common stock outstanding = 300,000 3:02 PM STOCK VALUATION 19 Example: Free Cash Flow Valuation Model What should the share price be for the company?Explanation / Answer
DEWHURST INC. Free Cash Flow at the end of 2020=FCF of 2020(1+gFCF)/(Weighted average cost of capital-gFCF) Free Cash Flow at the end of 2020=($600000*((1+.03)/(.09-.03)= Free Cash Flow at the end of 2020=($618000/.06) $ 10,300,000.00 Total Free cash flow of 2020 is measurd by FCF of 2020 +FCF at the end of 2020 Total Free Cash Flow of 2020=($600000+$10300000) $ 10,900,000.00 Total Value of entire company Year Free Cash Flow=(A) PV Factor 9% for 5 years=(B) Present Value of cash flow=(A)*(B) 2016 $ 400,000.00 0.917 $ 366,800.00 2017 $ 450,000.00 0.842 $ 378,900.00 2018 $ 520,000.00 0.772 $ 401,440.00 2019 $ 560,000.00 0.708 $ 396,480.00 2020 $ 10,900,000.00 0.650 $ 7,085,000.00 Value of entire company $ 8,628,620.00 Value of Common Stock=Value of Entire company-Market Value of Debt-Market Value of Preferred stock Value of common stock=($8628620-$3100000-$800000) $ 4,728,620.00 Number of common stock outstanding $ 300,000.00 Value per share=(Value of common stock/No. of common stock outstanding) Value per share=($4728620/300000) $ 15.76 Per share Share Price of the company is $15.76 Per share