13. Zero had a FCFF of $4.5M last year and has 2.25M shares outstanding. Zero\'s

Question

13. Zero had a FCFF of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 12% and WACC is 10%. If FCFF is expected to grow at 8% forever, the intrinsic value of Zero's shares are ____________. The company has zero debt and no non-operating assets.

14. Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFF in year 2 of $1.97, and per share FCFF in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8% per year. An appropriate discount rate for the stock is 11%. The stock should be worth _______ today. The company has zero debt and no non-operating assets.

15. The growth in per share FCFE of SYNK, Inc. is expected to be 8%/year for the next two years, followed by a growth rate of 4%/year for three years; after this five year period, the growth in per share FCFE is expected to be 3%/year, indefinitely. The required rate of return on SYNC, Inc. is 11%. Last year's per share FCFE was $2.75. What should the stock sell for today?

Explanation / Answer

13) Intrinsic value of equity = ([4.5*1.08)/(0.12 - 0.08)/2.25 = $54

14) The worth of the stock today is the PV of the expected per share FCFE.

= 1.65/1.11 + 1.97/1.11^2 + 2.54/1.11^3 + ((2.54*1.08)/(0.11 - 0.08))/1.11^3 = $71.80.

15)

Year Per share FCFE pvif @ 11% PV 0 2.75 0.9009 2.48 1 2.97 0.8116 2.41 2 3.21 0.7312 2.35 3 3.34 0.6587 2.20 4 3.47 0.5935 2.06 5 3.61 0.5346 1.93 Total PV of per share FCFE from Yrs 1 to 5 13.42 6 3.72 Continuing value = 3.72/(0.11 - 0.03) = 46.88 PV of continuing value = 46.88*0.5346 = 25.06 The stock should sell for 13.42 + 25.06 = $38.48

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