| 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 | 4 | ||
| Free cash flow | -$20.0 | $20.0 | $80.0 | $84.0 | ||
| 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). | ||||||
| Current | Projected | |||||
| 0 | 1 | 2 | 3 | 4 | ||
| Free cash flow | -$20.0 | $20.0 | $80.0 | $84.0 | ||
| 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 | ||||||
| PV of FCF | ||||||
| Value of operations (PV of FCF + HV) | ||||||
| c. Calculate the estimated Year-0 price per share of common equity. | ||||||
| Value of operations | ||||||
| Plus value of narketable securities | ||||||
| Total value of company | ||||||
| Less value of debt | ||||||
| Less value of preferred stock | ||||||
| Estimated value of common equity | ||||||
| Divided by number of shares | ||||||
| Price per share |
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