Barrett industries invest a large sum of money in R&D, as a result it retains an

Question

Barrett industries invest a large sum of money in R&D, as a result it retains and reinvests all of its earnings. A major pension fund is interested in purchasing Barretts stock. The pension fund manager has estimated barretts free cash flows for the next 4 yrears as follows: $3 million, 6 million, 10 million and 15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barretts WACC is 12%, its debt to preffered stock total $60 million, and it has 10 million shares of common stock outstanding.

A) what is is present value of the free cash flows projected during the next four years.
B) what is the firms terminal value
C) what is the firms total value today?
D) what is an estimate of Barretts price per share?

Explanation / Answer

Present value of free cash flows:       Present value of cash flows            = FCF1/(1+WACC)^1 + FCF2/(1+WACC)^2 + FCF3/(1+WACC)^3+FCF4/(1+WACC)^4            = $3 million/(1+0.12) + $6 million/(1+0.12)^2 + 10 million/(1+0.12)^3 + 15 million/(1+0.12)^4             = 2.68 million + 4.78 million+ 7.12 million + 9.53 million             = $24.11 million. Therefore the present value of free cashflows for the next four years is $24.11 million

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.