Heavy Metal Corporation is expected to generate the followin

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year FCF ($ million) (Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet.) 2 3 5? 53.4 69.7 79.1 76.1 80.8 After that, the free cash flows are expected to grow at the industry average of 3.7% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14.6%; a. Estimate the enterprise value of Heavy Metal b. If Heavy Metal has no excess cash, debt of $292 million, and 39 million shares outstanding, estimate its share price

Solution

a. Enterprise Value $ 626.13 Million b. Share Price $ 8.57 Workings: All cash amounts are in $ million Step-1:Calculation of present value of 5 years cash flow Year Cash flow Discount factor Present Value 1 53.4      0.8726         46.60 2 69.7      0.7614         53.07 3 79.1      0.6644         52.56 4 76.1      0.5798         44.12 5 80.8      0.5059         40.88 Total      237.22 Step-2:Calculation of terminal value Terminal Value = FCF5*(1+g)/(Ke-g) Where, = 80.8*(1+0.037)/(0.146-0.037) FCF5 80.8 =      768.71 Ke 14.6% g 3.7% Step-3:Present Value of terminal value Present Value = Terminal Value x Discount factor =      768.71 x      0.5059 =      388.90 Step-4:Calclation of total present value of cash flow Total present value of cash flow = Present Value of five years cash flow + Present Value of terminal value =      237.22 +      388.90 =      626.13 As per discounted free cash flow method, enterprise value is the present value of cash flow. So, Enterprise value      626.13 Step-5:Calclation of share price Enterprise value      626.13 Less:Value of debt      292.00 Value of Equity      334.13 /Number of shares 39 Share Price $       8.57