At the beginning of its fiscal year 2006, an analyst made the following forecast

Question

At the beginning of its fiscal year 2006, an analyst made the following forecast General Mills, Inc., the consumer foods company, for 2006-2009 (in millions of General Mills reported $6,192 million in short-term and long-term debt at the end of 2005 but very little in interest-bearing debt assets. Use a required return of 9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of 2006 under two forecasts for long-run cash flows: Free cash flow will remain at 2009 levels after 2009. Free cash flow will grow at 3 percent per year after 2009. General Mills had 369 million shares outstanding at the end of 2005, trading at $47 per share. Calculate value per share and a value to price ratio under both scenarios.

Explanation / Answer

Value of the Firm under both options

A) Year Cash inflow Outflow Net Flow PVF@9% 2006 2014 300 1714 0.917431 1572.48 2007         2,057 380 1677 0.84168 1411.50 2008         2,095                                                 442 1653 0.772183 1276.42 2009 2107 470 1637 0.708425 1159.69 Pv of cash flows 5420.09 Add: Terminla Value 18188.89 (1637/9%) Value of the Firm        23,609 Value of Equity(23609-6192)        17,417

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