Nabor industries is considering going public but is unsure of a fair offering pr
ID: 2743313 • Letter: N
Question
Nabor industries is considering going public but is unsure of a fair offering price for the company. 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 13%, and it has $2,000,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flow over next 3 years, 2004 through 2006, are given below. Beyond 2006 to infinity, the firm expects its free cash flow to grow by 4% annually. Estimate the value of Nabor industries' entire company by using the free cash flow valuation model. $3, 666, 657.08 $3, 289, 999.80 $3, 387, 777.08 $3, 287, 689.08 $3, 892, 587.08Explanation / Answer
Solution :
year
cash flow
Discount factor at 13%
present value
1
200000
0.884955752
176,991.15
2
300000
0.783146683
234,944.01
3
400000
0.693050162
277,220.06
3
4622222.22*
0.693050162
3,203,431.86
VALUE OF COMPANY
3,892,587.08
*since the growth is perpetual after year 3, we can use gordon's formula
value at year 3 = cash flow at year 4/(WACC-GROWTH)
400000*1.04/(0.13-0.04)
4,622,222.22
year
cash flow
Discount factor at 13%
present value
1
200000
0.884955752
176,991.15
2
300000
0.783146683
234,944.01
3
400000
0.693050162
277,220.06
3
4622222.22*
0.693050162
3,203,431.86
VALUE OF COMPANY
3,892,587.08
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.