1. (20 points) You are valuing a potential acquisition target J-Mart. The compan

Question

1. (20 points) You are valuing a potential acquisition target J-Mart. The company forecasts the following free cash flows (FCFF in millions of dollars). The weighted average cost of capital is estimated at 13 percent and the free cash flows are expected to continue growing at 5% after Year 3.

Year: 1 2 3 Free cash flow: -$20 $40 $42

The company’s balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $170 million in debt, $40 million in preferred stock, and $100 million in total common equity.

a) Estimate the value of the firm.

b) If the company has 10 million outstanding shares of stock, what is your best estimate for the stock price per share?

Explanation / Answer

a)Valuation Of Business                                                                   (in $)

Year              FreeCashFlow         WACC@18%          Dcounted Cash Flow

1                        20                         0.8474                     16.948

2                        40                         0.7181                     28.724

3                        42                         0.6086                     25.5612

                                                           Total=101.2332

b) If the company has 10 million outstanding shares of stock, $10 is best estimate for the stock price per share.

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