You are valuing a potential acquisition target J-Mart. The company forecasts the

Question

You are valuing a potential acquisition target J-Mart. The company forecasts the following free cash flows (FCFF in millions of dollars). The weighted average cost of capital is estimated at 13 percent and the free cash flows are expected to continue growing at 5% after Year 3.

            Year:                         1                  2         3

            Free cash flow:    -$20              $40     $42

            The company’s balance sheet shows $20 million in short-term investments that are unrelated to operations. The balance sheet also shows $170 million in debt, $40 million in preferred stock, and $100 million in total common equity.

Estimate the value of the firm.

If the company has 10 million outstanding shares of stock, what is your best estimate for the stock price per share?

Explanation / Answer

J _mart Valuation Year1 Year2 Year3 Year4 Cash Flow -20 40 42 551.25 (all future cash flows) =42*1.05/(0.13-0.05) Discount factor @13% 0.885 0.783 0.693 0.613 PV od cash flows              (17.70)         31.33         29.11                    338.09 Total PV of free cash flows 380.83 Valuation of J -Mart Amt $ million PV of future cash flows 380.83 Add: Short term investment 20 Less :Debt 170 Less: Preferred stock 40 Net Value 190.83 Outstanding Common shares 10 millions Share price /common stock 19.08 per share

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