Please show step by step. Thank you.
Answer:56,839,763.08
River Rat Rafters sells virtual rafting trips. The firm has an offer from a hedge fund to buy the company. The board of directors need to know the value of common equity and have asked for your opinion. The firm has $1,847,157 in preferred equity and the market value of its outstanding debt equals $2,707,096. The WACC for this firm is estimated to be 8.08%. Use the DCF valuation model with the expected FCFs shown below; year 1 represents one year from today and so on. The company expects to grow at a 3.6% rate after Year 5. Rounding to the nearest penny, what is the value of common equity?
Period Free Cash Flow
Year 1 $1,355,865
Year 2 $1,034,136
Year 3 $2,211,723
Year 4 $2,704,212
Year 5 $3,394,012
Answer:56,839,763.08
How:
1. Value of operations using the DCF & cost of capital as the rate (use the decimal of the cost of capital for example 6.9% =.069)
In Excel use the NPV formula=npv(cost of capital, YR1 CF, YR2 CF, YR3 CF, YR 4CF, YR5 CF) = PV of the cash flows
Next, add the terminal value to the Cash flow value:
Calculate the terminal value by
a. multiplying year 5 cash flow by 1+growth rate to get the next year's value
b. divide the next year's value by (cost of capital - growth rate) Note: use the decimal of the interest rates.
c. bring the value to the present by calculating the PV. In Excel =pv(rate,years,0,-FV) where the rate is the cost of capital, years is 5, 0 payment, and the FV is the negative of the value calculated in b.
The terminal value + pv of cash flows = operating value
2. Equity value = operating value - debt; subtract the debt from the operating value calculated above.