Barrett Industries invests a large sum of money in R&D; as a result, it retains

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, $11 million, and $16 million. After the fourth year, free cash flow is projected to grow at a constant 4%. Barrett?s WACC is 10%, the market value of its debt and preferred stock totals $68 million, and it has 18 million shares of common stock outstanding. Write out your answers completely. For example, 13 million should be entered as 13,000,000. a. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. b. What is the firm?s horizon, or continuing, value? Round your answer to the nearest cent. c. What is the firm?s total value today? Round your answer to the nearest cent. d. What is an estimate of Barrett?s price per share? Round your answer to the nearest cent.

Explanation / Answer

Answer:a The present value of the free cash flows projected during the next 4 years is $27.70 million

Answer:b Firm's Horizon value:

(16 x 1.04) / (0.10 - 0.04) =$277.333

Answer:c Firm's total value today:

27.70 + 277.333 / (1.10^4) = 217.120

Answer:d Estimate price per share:

(217.120 - 68) / 18 million shares = $8.28444 per share

Year P.V.F (10%) cash flows ($) in millions PV ($) in millions 1 0.909 3 2.727 2 0.8264 $7.00 5.7848 3 0.7513 $11.00 8.2643 4 0.683 $16.00 10.928 Total 27.70

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