Build a Model LIDIA SOLANO

Chapter: 7 Valuation of Stocks and Corporations

Problem: 25
Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

INPUTS (In millions) Year

Current Projected
0 1 2 3
Free cash flow -$20.0 $20.0 $80.0
Marketable Securities $40
Notes payable $100
Long-term bonds $300
Preferred stock $50
WACC 9.00%
Number of shares of stock 40

a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period
immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.

Current Projected
0 1 2 3
Free cash flow -$20.0 $20.0 $80.0
Long-term constant growth in FCF
Horizon value

b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated
Year-0 value of operations.

PV of horizon value $1,621.59

PV of FCF $60.26
Value of operations (PV of FCF + HV) $1,681.84

c. Calculate the estimated Year-0 price per share of common equity.

Value of operations $1,681.84

Plus value of narketable securities $40.00
Total value of company $1,721.84
Less value of debt $400.00
Less value of preferred stock $50.00
Estimated value of common equity $1,271.84
Divided by number of shares $40.00
Price per share $31.80
 3/19/2020

ollowing questions.

cted
4
$84.0

forecast period
Year 3.

cted
4
$84.0
5.0%
$2,100.00

lows, and the estimated