Barrett Industries invests a large sum of money in R&D; as a result, it retains
ID: 2628185 • Letter: B
Question
Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $3 million, $7 million, $8 million, and $14 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Barrett's WACC is 12%, the market value of its debt and preferred stock totals $66 million, and it has 17 million shares of common stock outstanding.
Answer using my numbers please, not another problem already worked. Thanks.
Explanation / Answer
Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $3 million, $7 million, $8 million, and $14 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Barrett's WACC is 12%, the market value of its debt and preferred stock totals $66 million, and it has 17 million shares of common stock outstanding.
A. What is the present value of the free cash flows projected during the next 4 years ?
Present Value of Free Cash Flow = FRCF1/(1+WACC) + FRCF2/(1+WACC)^2 + FRCF3/(1+WACC)^3 + FRCF4/(1+WACC)^4
Present Value of Free Cash Flow = 3000000/(1+12%) + 7000000/(1+12%)^2 + 8000000/(1+12%)^3 + 14000000/(1+12%)^4
Present Value of Free Cash Flow = $ 22,850,423.65
B. What is the firm's terminal value ?
Firm's terminal value = (FRCF5/(WACC- g))
Firm's terminal value = (14000000*1.06/(12%-6%))
Firm's terminal value = $ 247,333,333.33
C. What is the firm's total value today ?
Firm's total value today = FRCF1/(1+WACC) + FRCF2/(1+WACC)^2 + FRCF3/(1+WACC)^3 + FRCF4/(1+WACC)^4 + (FRCF5/(WACC- g))/(1+WACC)^4
Firm's total value today = 3000000/(1+12%) + 7000000/(1+12%)^2 + 8000000/(1+12%)^3 + 14000000/(1+12%)^4 + (14000000*1.06/(12%-6%))/(1+12%)^4
Firm's total value today = $ 180,035,228.38
D. What is an estimate of Berrett's price per share ?
Market value of its debt and preferred stock = $ 66,000,000
Market value of Common Stock = 180,035,228.38-66,000,000
Market value of Common Stock = $ 114,035,228.38
Berrett's price per share= Market value of Common Stock / No of shares of common stock outstanding
Berrett's price per share = 114,035,228.38/17,000,000
Berrett's price per share= $ 6.71
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