Problem 9-19 Corporate valuation Barrett Industries invests a large sum of money

Question

Problem 9-19
Corporate valuation

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: $4 million, $5 million, $12 million, and $14 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Barrett's WACC is 10%, the market value of its debt and preferred stock totals $68 million, and it has 8 million shares of common stock outstanding.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1) What is the firm's total value today? Round your answer to the nearest cent.

2) What is an estimate of Barrett's price per share? Round your answer to the nearest cent.

Explanation / Answer

1) What is the firm's total value today? Round your answer to the nearest cent.

Firm's total value today = FCFF1/(1+WACC) + FCFF2/(1+WACC)^2 + FCFF3/(1+WACC)^3 + FCFF4/(1+WACC)^4 + (FCFF5/(WACC-growth rate))/(1+WACC)^4

Firm's total value today = 4000000/1.10 +  5000000/1.10^2 +  12000000/1.10^3 +  14000000/1.10^4   + (14000000*1.06/(10%-6%))/1.10^4

Firm's total value today = $ 279,744,552.97

2) What is an estimate of Barrett's price per share? Round your answer to the nearest cent.

Estimate of Barrett's price per share = (Firm's total value today-market value of its debt and preferred stock)/shares of common stock outstanding

Estimate of Barrett's price per share = (279744552.97-68000000)/8000000

Estimate of Barrett's price per share = $ 26.47

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