Cash flows (CFs)..."#)" is the time from "now"
1) 10m
2) 10m(1.12) = 11,200,000
3) 10m(1.12^2) = 12,544,000
4) 12.544m(1.02) = 12,794,880
FYI - If it really were a 5 year time horizon the CFs for 4 & 5 would be...
4) 10m(1.12^3) = 14,049,280
5) 14.04928m(1.02) = 14,330,265.60
a) PV = 10m/1.06 + 11,200,000/1.06^2 + 12,544,00/1.06^3 =29,934,106.68
b) PV of FCF#4 at t=3 = FCF#4 / (r - g)...
= 12,794,880 / (0.06 - 0.02)
= 319,872,000
for use in "c"....
PV of that value at t = 0...
319,872,000 / 1.06^3 = 268,570,699.30
c) PV of FCFs available to equity holders:
29,934,106.68 + 268,570,699.30 - debt of 200,000,000 = 98,504,805.98
...divide by 100m shares = $0.98505, round to $0.99
Quatro Systems (“QS”) expects total free cash flow (“FCF”) of $10 million one year from now. Analysts expect this FCF to grow at 12% per year thereafter until the end of the fourth year (again, from now.) After that, FCF growth will level off at long-run rate of 2% per year, remaining at that rate in perpetuity.
Assume QS has 100 million common shares outstanding, debt of $200 million and cash of $50 million. According to the discounted free cash flow model, what is the value of a share of QS common stock if the firm’s weighted average cost of capital is 6%? Show answers to the nearest cent.
You may find drawing a timeline helpful, and you may also find equations 9.23 and 9.24 from the text helpful. Please show your work.
a) Compute the present value of the FCF over the first three years.
b) Compute the present value at the end of year 3 of the long-run FCF beginning in year four.
c) Use your answers in a) and b), and the assumptions on QS's debt, cash and number of outstanding shares, to compute the present value of a share of QS common stock today.
