It is January 2014. Google has offered to buy your internet startup. The Google

Question

It is January 2014. Google has offered to buy your internet startup. The Google negotiators and you both agree on the following expectations.

After 2018, free cash flows are expected to grow by 3% per year. Based on the riskiness of your industry, you think that your weighted average cost of capital is 15%.

You have bank loans worth $400,000 outstanding.

a) What is the terminal value, i.e., the present value of all free cash flows from 2019 to infinity expressed in 2018-dollars?

b) What is the total value of the company?

c) What is the value per share of common stock if you have 100,000 shares outstanding?

Year Expected free cash flow
to the firm
(end of year) 2014 120,000 2015 180,000 2016 270,000 2017 360,000 2018 450,000

Explanation / Answer

Answer:a Terminal value =2018=[450000*(1.03)]/(0.15-0.03)=3862500

Answer:b

Answer:c) Value per share=2767865/100000=$27.67865 per share

Year Expected free cash flow to the firm (end of year) P.V.F (15%) PV ($) 2014 120,000 0.8695 104340 2015 180,000 0.7561 136098 2016 270,000 0.6575 177525 2017 360,000 0.57175 205830 2018 450,000 0.497176 223729.2 2018 3,862,500 0.497176 1920342 Total value 2767865

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