Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years.

Year 1 2 3 4 5
FCF($million) 52.1 68.6 78.3 74.4 81.1
After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:
A. Estimate the enterprise value of Heavy Metal.
B. If Heavy Metal has no excess cash, debt of $304 million, and 41 million shares outstanding, estimate its share price.

Answer 1

Enterprise value of Heavy Metal= $1,080.766

Share price = $18.945 per unit

Step-by-step explanation:

The value of a firm is the present value of the free cash flow discounted at the weighted average cost of capital

Year PV

1 52.1 × 1.14^(-1) = 45.70175439

2 68.6 × 1.14^(-2) = 52.40073869

3 78.6 × 1.14^(-3) = 53.05276117

4 74.4× 1.14^(-4) = 44.05077264

5 81.1 × 1.14^(-5) = 42.12079868

Year and beyond

81.1 × 1.04/(0.14-0.04) = 843.44

Total value = 45.70+ 52.40+53.052 + 44.050 +42.120+ 843.44 = 1080.766826

Enterprise value of Heavy Metal= $1,080.766

Share price = Total value - Debt value / number of shares

= (1,080.766 - 304 )/ 41 million units= $18.945 per unit

Share price = $18.945 per unit