The venture investors and founders of ACE Products, a closely held corporation,
ID: 2684499 • Letter: T
Question
The venture investors and founders of ACE Products, a closely held corporation, are contemplating merging the successful venture into a much lager diversified firm that operates in the same industry. ACE estimates its free cash flows that will be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage, ACE's free cash flows are expected to continue to grow at a 6 percent annual compound growth rate in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15 percent. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture has surplus cash of $4 million. ACE currently has five million shares outstanding, with three million held by venture investors and two million held by founders. The venture investors have an average investment of $2.50 per share while the founders' average investment is $.50 per share. A. Based on the above information, estimate the enterprise value of ACE Products. What would be the value of the ventureExplanation / Answer
A)
The value of the firm under Free Cash Flows model can be computed using the following formulae:
Value of the firm =Free cash flow/Cost of equity-Growth
=$5,200,000/(15%-6%)
=$5,200,000/9%
=$57,777,778
Thus, the value of the firm is $57,777,778.
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