Question

You are considering the acquisition of XYZ Enterprises. You have made the following projections for XYZ for years 1-5 ($ millions): Year 1 Year 2 Year 3 Year 4 Year 5 EBIT $ 20 $ 22 $ 25 $ 26 $ 30 Depreciation 5 5 6 7 8 Capital Expenditures 10 10 15 15 15 Investment in Working Capital 3 4 4 3 4 Assume a tax rate of 34%, a WACC of 13%, 2 million shares outstanding, $30 million debt value, and a growth rate of 5% after year 5. What is the estimated value per share to the nearest penny of XYZ using the perpetual growth method for calculating terminal value

Answer 1

Value per share = $26.29675928947 rounded off to $26.30

Step-by-step explanation:

To calculate the value of shares today, we first need to calculate the value of firm. We can calculate the value of firm by using the FCFF approach. The FCFF is calculated as follows,

FCFF = EBIT * (1- tax rate) + Depreciation - Capital Expenditure - Working Capital Investment

FCFF - Year 1 = 20 * (1-0.34) + 5 - 10 - 3 = 5.2 million

FCFF - Year 2 = 22 * (1-0.34) + 5 - 10 - 4 = 5.52 million

FCFF - Year 3 = 25 * (1-0.34) + 6 - 15 - 4 = 3.5 million

FCFF - Year 4 = 26 * (1-0.34) + 7 - 15 - 3 = 6.16 million

FCFF - Year 5 = 30 * (1-0.34) + 8 - 15 - 4 = 8.8 million

The value of firm can be calculated as follows,

Value of Firm = FCFF1 / (1+WACC) + FCFF2 / (1+WACC)^2 + ... +

FCFFn / (1+WACC)^n + [(FCFFn * (1+g) / (WACC - g)) / (1+WACC)^n]

Value of firm = 5.2 / (1+0.13) + 5.52 / (1+0.13)^2 + 3.5 / (1+0.13)^3 +

6.16 / (1+0.13)^4 + 8.8 / (1+0.13)^5 + [(8.8 * (1+0.05) / (0.13 - 0.05)) / (1+0.13)^5

Value of Firm = 82.59351857894 million

Value of Equity = Value of firm - value of debt

Value of equity = 82.59351857894 - 30

Value of equity = $52.59351857894 million rounded off to 52.59 million

To calculate the price per share, we need to divide the value of equity by the number of shares outstanding

Value per share = $26.29675928947 rounded off to $26.30