Build a Model Solution 11/26/2018
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)
Current
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
Current
0 1 2 3 4
Long-term constant growth in FCF 5.0%
Horizon value $2,205.00
PV of horizon value $1,562.08
PV of FCF $119.77
Value of operations (PV of FCF + HV) $1,681.84
Plus value of narketable securities $40.00
Less value of debt $400.00
Less value of preferred stock $50.00
Divided by number of shares $40.00
Year
c. Calculate the estimated Year-0 price per share of common equity.
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.
Projected
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.
Projected