Free cash flow valuation Nabor Industries is considering going public but is uns

Question

Free cash flow valuation Nabor Industries is considering going public but is unsure

of a fair offering price for the company. Before hiring an investment banker to assist

in making the public offering, managers at Nabor have decided to make their own

estimate of the firm’s common stock value. The firm’s CFO has gathered data for

performing the valuation using the free cash flow valuation model.

The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of debt

at market value and $400,000 of preferred stock at its assumed market value. The estimated

free cash flows over the next 5 years, 2016 through 2020, are given below.

Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.

Year (t) Free cash flow (FCFt)

2016 $200,000

2017 250,000

2018 310,000

2019 350,000

2020 390,000

a. Estimate the value of Nabor Industries’ entire company by using the free cash

flow valuation model.

b. Use your finding in part a, along with the data provided above, to find Nabor Industries’

common stock value.

c. If the firm plans to issue 200,000 shares of common stock, what is its estimated

value per share?

Explanation / Answer

Nabor Industries Details Year 2016 Year 2017 Year 2018 Year 2019 Year 2020 Free Cash flow               200,000          250,000          310,000           350,000              390,000 WACC =11%, free cash flow growth rate beyond 2020 is @3% So Terminal Value at Year 20 End =390000*1.03/(0.11-0.03)          5,021,250 Total Free cash flows               200,000          250,000          310,000           350,000          5,411,250 PV factor @11%=                    0.901              0.812               0.731                0.659                   0.593 PV of free cash flows = $       180,180.2 $ 202,905.6 $ 226,669.3 $   230,555.8 $ 3,211,313.5 Total of PV of Cash flows= $ 4,051,624.46 a Value of Nabor Industries = $ 4,051,624.46 b Value of Nabor Industries = $ 4,051,624.46 Less Market value of debt           (1,500,000) Less Market value of preferred share             (400,000) Value of Common stock = $ 2,151,624.46 c Value of Common stock = $ 1,751,624.46 Planned no of shares to be issued               200,000 Estimated value per share $                  8.76

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