d. TTC recently introduced a new line of products that has been wildly successfu

Question

d. TTC recently introduced a new line of products that has been wildly successful. On the basis of this success and anticipated future success, the following free cash flows were projected FCF (in millions S5.5 $12.1 $23.8 $44.1 S69.0 $88.8 $107.5 $128.9 $147.1 $161.3 Year 7 9 10 After the 10th year, TTC's financial planners anticipate that its free cash flow will grow at a constant rate of 6%. Also, the firm concluded that the new product caused the WACC to fall to 9%. The market value of TTC's debt is $1,200 million, it uses no preferred stock, and there are 20 million shares of common stock outstanding. Use the corporate valuation model approach to value the stock. INPUT DATA: (Dollars in Millions) WACC gn Millions of shares MV of debt 9% 690 20 $1,200

Explanation / Answer

Calculation of present value of future cash flows of 10 years. Years FCF ( In Millions) Present value factor at 9% Present value amounts (In Millions) 1 5.5 0.9174 5.0459 2 12.1 0.8417 10.1843 3 23.8 0.7722 18.3780 4 44.1 0.7084 31.2416 5 69 0.6499 44.8453 6 88.8 0.5963 52.9485 7 107.5 0.5470 58.8062 8 128.9 0.5019 64.6906 9 147.1 0.4604 67.7289 10 161.3 0.4224 68.1349 Total 422.0041 Calculation of terminal value of 10th year as per the formula The formula is FCF11/WACC-g FCF11= FCF10 year add the growth rte of 6% FCF11 161.30+161.30*6/100 FCF11 170.978 Terminal value of 10th year is 170.978/(0.09-0.06) Terminal value 5699.267 Present value of terminal value of 10th year 10th year terminal value * present value factor of 10th year Terminal value of 10the year present value factor of 10th year Present value amount 5699.267 0.422 2407.432 Value of total corporation is present value of 10 years cash flows and the present value of 10th year terminal value. Calculation of value per share Particulars Amount in millions present value of 10 years cash flows 422.004 present value of 10th year terminal value 2407.432 Total value of corporation 2829.436 Less: market value of Debt and preferred 1200.000 Value of common equity 1629.436 Number of shares in millions 20.000 Value per share (Value of equity/Number of shares) 81.472

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