Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 5% rate. Dantzler's WACC is 12%.

Year 0 1 2 3
....... ....... ....... ....... ....... ....... ....... .......
  ....... ....... ....... ....... ....... ....... ....... ......
FCF ($ millions)   - $22 $19 $52
  1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
    $   million

  2. What is the firm's market value today? Assume that Dantzler has zero nonoperating assets. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round intermediate calculations. Round your answer to two decimal places.
    $   million

  3. Suppose Dantzler has $139.20 million of debt and 19 million shares of stock outstanding. What is your estimate of the current price per share? Write out your answer completely. For example, 0.00025 million should be entered as 250. Do not round intermediate calculations. Round your answer to the nearest cent.
    $   
Expert Solution
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Step 1: Introduction

We can determine the horizon value using the formula below:

H o r i z n space v a l u e space equals space fraction numerator F r e e space c a s h space f l o w space i n space y e a r space 3 space cross times space left parenthesis 1 plus g r o w t h space percent sign right parenthesis over denominator W A C C thin space minus space g r o w t h space percent sign end fraction

The value of the firm is the PV of all free cash flows and horizon value. 

We can determine the value of equity using the formula below:

S h a r e space v a l u e space equals space fraction numerator V a l u e space o f space f i r m space minus space v a l u e space o f space d e b t over denominator n u m b e r space o f space s h a r e s end fraction

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