Question

Our acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $12 million. Its WACC is 11% and it is expected to grow at a constant rate of 3%. The company has marketable securities of $70 million. It is financed with $100 million of debt, $20 million of preferred stock, and $100 million of book equity. Find the value of the firm (in million).

Answer 1

$154.50 million

Step-by-step explanation:

Current FCF = $12 million

Growth Rate = 3%

Expected FCF = Current FCF * (1 + Growth Rate)

Expected FCF = $12 million * 1.03

Expected FCF = $12.36 million

Value of Firm = Expected FCF / (WACC - Growth Rate)

Value of Firm = $12.36 million / (0.11 - 0.03)

Value of Firm = $12.36 million / 0.08

Value of Firm = $154.50 million