Homework SourseHeavy 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
1
2
3
4
5
FCF? ($ million)
53.453.4
66.466.4
78.178.1
74.674.6
81.381.3
?(Click
spreadsheet.?)
After? that, the free cash flows are expected to grow at the industry average of
3.7 %3.7%
per year. Using the discounted free cash flow model and a weighted average cost of capital of
14.7 %14.7%?:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess? cash, debt of
$ 303$303
?million, and
4242
million shares? outstanding, estimate its share price.
| Year | 1 | 2 | 3 | 4 | 5 | |
| FCF? ($ million) | 53.453.4 | 66.466.4 | 78.178.1 | 74.674.6 | 81.381.3 | |
| ?(Click on the icon located on the? top-right corner of the data table in order to copy its contents into aspreadsheet.?) |
Solution
a). V5 = D5(1 + g)/(r - g)
= $81.3(1.037)/(0.147 - 0.037)
= $84.3081/0.11 = $766.44 million
V0 = D1/(1 + r)1 + D2/(1 + r)2 + D3/(1 + r)3 + D4/(1 + r)4 + (D5 + V5)/(1 + r)5
= $53.4M/1.1471 + $66.4M/1.1472 + $78.1M/1.1473 + $74.6M/1.1474 + ($81.3M + $766.44M)/1.1475
= $46.56M + $50.47M + $51.76M + $43.10M + $427.02M = $618.90 million
b). P = ($618.90 + $0 - $303M)/42M = $315.90M/42M = $7.52
