FIN – Derby Corporation Problem
by ella | Mar 26, 2024 | Finance
| 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 |
|
|
|
|
|
|
