8 Hectonitis Corp ocurrently has an FCF of $13 million. A reputable analyst esti

Question

8 Hectonitis Corp ocurrently has an FCF of $13 million. A reputable analyst estimates that this FCF ii anticipaled to increase by 2% per year fr the next 5 years. The analyst est mates that at the end of 5 years the company's terminal value will he based on the year RFand a kng-term RF growth tate of 4%. Suppose the Hector?tis ?. 13,tbe '.-3%, the market risk premium E(e)-.-14%, and Heckrilis has 8 million shares outstanding. H should the analyst value the shares of the company? Assume all cash fows occur at year end QUESTION 6 8b what is FCF in year 5

Explanation / Answer

Computation of FCFs:

Ke = Rf + Beta ( Rp)

= 3% + 1.5 ( 14%)

= 3% + 21%

= 24%

Value of company at year 5 = FCF6 / (Ke - g )

= 23826859.56 / ( 24% - 4 % )

= 23826859.56 / ( 20% )

= $ 119,134,297.8

Value of firm today:

= PV of Cash flows from it.

Thus Value of company today is $ 89,031,626.57

Share Price = Value of company / No. of shares

= 89,031,626.57 / 8,000,000

= $ 11.13

Pls comment, if any further assistance is required.

Year FCF Formula Calculation 1 $ 14,560,000.00 FCF0(1+g) 13M * 1.12 2 $ 16,307,200.00 FCF1(1+g) 14.56M * 1.12 3 $ 18,264,064.00 FCF2(1+g) 16.307M * 1.12 4 $ 20,455,751.68 FCF3(1+g) 18.264M * 1.12 5 $ 22,910,441.88 FCF4(1+g) 20.455 M *1.12 6 $ 23,826,859.56 FCF5(1+g) 22.91 M * 1.04

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