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Practice Problem on Valuation

1. A company forecasts free cash flow in one year to be -$10 million and free cash flow in two years to be $20 million.  After the second year, free cash flow will grow at a constant rate of 4 percent per year forever.  If the overall cost of capital is 14 percent, what is the current value of operations, to the nearest million? (Use the FCF to the firm model)

2.         Using the FCF to the firm model, the value of a company’s operations is $400 million. The company’s balance sheet shows $20 million in short-term investments that are unrelated to operations.  The balance sheet also shows $50 million in accounts payable, $90 million in notes payable, $30 million in long-term debt, $40 million in preferred stock, and $100 million in total common equity. If the company has 10 million shares of stock, what is your best estimate for the stock price per share?

3.        A company plans to use the FCF to the firm and free cash flow to equity model to evaluate the share price.  The Current EBIT is $2,000,000 which is expected to grow at 20 percent a year for the next five years.  The growth rate is assumed to be 5 percent afterwards.  The interest expense is 20 percent of EBIT and the tax rate is 30 percent of EBT.  The depreciation expense is assumed constant every year at $200,000.  The current amount of working capital is $500,000 and is assumed to increase 20 percent per year.  The company plans to invest in fixed assets two years from now for the amount of $800,000.  Currently the company has an obligation to pay down the debt (principal) amounted to $200,000 every year for the next ten years.  The current WACC is 12 percent.  The cost of debt is 6 percent and cost of equity is 15 percent per year.  The company has an outstanding 100,000 share.  Compute the price per share using the free cash flow to equity method.