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 the present value of the free chas flows projected during the next 4 years?
B. What is the firm's terminal value?
C. What is the firm's total value today?
D. What is an estimate of Barrett's price per share?

Explanation / Answer

A.present value of the free cash flows projected during the next 4 years = $3/1.12+ 6/1.12^2 + 10/1.12^3+ 15/1.12^4 = $24.112 million B.Terminal value = 15*1.07/(12%-7%) =$321million C. firm's total value today = $24.112 million +$321million/1.12^4 = $228.11million D.Barrett's price per share =$228.11/10 = $22.81 per share

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