You are performing a valuation of a retail firm based on free cash flow to the firm (FCFF). You want to buy the firm, own it for 8 years and then sell it. FCFF in the most recent 12 months (year 0) was K3.65 million. You expect cash flows to grow at an annual rate of 4% for the next five years and then settle at the year 5 level per year for the remaining 3 years. The firm's cost of equity is 10% and its weighted average cost of capital is 8%. What price should you pay for this firm based on the discounted value of FCFF? Explain your answer.

You are performing a valuation of a retail firm based on free cash flow to the firm (FCFF). You want to buy the firm, own it for 8 years and then sell it. FCFF in the most recent 12 months (year 0) was K3.65 million. You expect cash flows to grow at an annual rate of 4% for the next five years and then settle at the year 5 level per year for the remaining 3 years. The firm's cost of equity is 10% and its weighted average cost of capital is 8%. What price should you pay for this firm based on the discounted value of FCFF? Explain your answer.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 18P: Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts...

See similar textbooks

Similar questions

You sold your online business to Google. Google agreed to pay you $70,000 now, $10,000 per year for the next 9 years and $100,000 in 10 years if the business meets certain performance targets. If you invested the money, you would earn a return of 9%. a. What is the present value of the combined cash flows, assuming the performance targets are met?
For example, if you a simple average of 5 year of either income or cash flow of:year 1 100year2 100year 3 100year 4 100year 5 100total 500average 100cap rate 0.2value 500 Now you go to the balance sheet as of the valuation date and have a cash balance of $500 and the industry working capital benchmark is $200, is it fair to add $300 to the value of the business? That is really the question. In practice, particularly matrimonial valuations, some practitioners would opine, if the owner sells the business they would realize $500 in value plus $300 in excess working capital for a total value of $800. Remember the value included the $300 ($100 each year), possibly not distributed cash flow/earnings, is that really value?
You are evaluating a prospective LBO investment and determine that the Year 5 free cash flow (FCF) estimate is $850 million. Additionally, based on related work you estimate that the appropriate discount rate is 8.5% and the long term growth rate is 3.5%. Based on the perpetuity growth method, the Terminal Value of the company is _________ in Year Group of answer choices a. $17.6 bn, year 5 b. $17.0 bn, year 6 c. $10.0 bn, year 5 d. $17.6 bn, year 6
Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years. Year 1 2 3 4 5 FCF (Rs. Million) 51 70 77 72 80 After this time period, the free cashflows will grow constantly at 3% per year. The firm’s cost of capital is 13%. Using the discounted free cashflow model, calculate the following. What is the enterprise value of Fauji Fertilizer Ltd? If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not?
Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years. Year 1 2 3 4 5 FCF (Rs. Million) 51 70 77 72 80 After this time period, the free cashflows will grow constantly at 3% per year. The firm’s cost of capital is 13%. Using the discounted free cashflow model, calculate the following. What is the enterprise value of Fauji Fertilizer Ltd? If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer? Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not?
Congratulations!!! You just landed your first job as a financial analyst for RB International. Your new boss is looking at an investment with the following timeline and cash flow. Including the initial outlay (which is at time 0), what is the present value of this investment assuming a 12% interest rate? Year 10 Cash Flows (1,000) O $658.31 O $89247 O $1.119.54 O $1.257.61 O $1.339.76 Year 1 395 Year 2 135 Year 3 920 Year 4 610 Year 5 1,475
Problem 2: Your firm has the option of making an investment in new software that will cost $278,367 today and is estimated to provide the savings shown in the following table over its 5-year life, Year Savings estimate $76,000 2 $106,400 3 $98,800 4 $53,200 $30,400 Should the firm make this investment if it requires a minimum annual return of 9% on all investments?
Question 2. Golf Ball Inc. expects earnings to be $10,000 per year in perpetuity if it pays out all of its earnings in dividends. Suppose the firm has an opportunity to invest $1,000 of next year's earnings to upgrade its machinery. It is expected that this upgrade will increase earnings in all future years (starting two years from now) by $140. Assume that Golf Ball's next dividend is one year from now. The required rate of return is 12%. What is the value of Golf Ball Inc. if it does not undertake the upgrade? *Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.
Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s weighted average cost of capital is WACC = 13%. What is Dozier’s horizon value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) What is the current value of operations for Dozier? Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share?
Q. Western Lumber Company expects to have free cash flow in the coming year of $4.25mand is expected to grow at 4% per year thereafter. The company has an equity cost of10% and a debt cost of 6% and pays corporate tax at 30%. If the company maintains adebt-to-equity ratio of 0.50, what is the value of the interest tax shield? Please answer by providing step by step solution and explaining the whole process
Suppose you own a business and you expect to generate a profit of $50,000 next year. Each year after that you expect your profit to grow by 4%. If you earn profits for 10 years total and the discount rate is 8%, what is your company’s valuation today (present value)? (Show layout in Excel Please)
Finance Suppose that you are attempting to raise money for new business venture. Beginning one month from now the business will generate $10,843 of free-cash-flow each month in perpetuity. Say Mark Cuban offers you $148,481 today to help you make the initial investment, but requires that you sell him 34% of the business. Assuming your firm is all equity financed, what monthly WACC corresponds to Mark’s valuation? Enter your answer as a percent (e.g., enter 0.055 as 5.5). Round your final answer to two decimals.