Selected data for the Derby Corporation are shown below. Use the data to answer the following questions. | ||||||
INPUTS (In millions) | Year | |||||
Current | Projected | |||||
0 | 1 | 2 | 3 | 4 | ||
Free cash flow | -$20.0 | $20.0 | $80.0 | $84.0 | ||
Marketable Securities | $40 | |||||
Notes payable | $100 | |||||
Long-term bonds | $300 | |||||
Preferred stock | $50 | |||||
WACC | 9.00% | |||||
Number of shares of stock | 40 | |||||
a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). | ||||||
Current | Projected | |||||
0 | 1 | 2 | 3 | 4 | ||
Free cash flow | -$20.0 | $20.0 | $80.0 | $84.0 | ||
Long-term constant growth in FCF | ||||||
Horizon value | ||||||
b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. | ||||||
PV of horizon value | ||||||
PV of FCF | ||||||
Value of operations (PV of FCF + HV) | ||||||
c. Calculate the estimated Year-0 price per share of common equity. | ||||||
Value of operations | ||||||
Plus value of narketable securities | ||||||
Total value of company | ||||||
Less value of debt | ||||||
Less value of preferred stock | ||||||
Estimated value of common equity | ||||||
Divided by number of shares | ||||||
Price per share |