Hofmann Enterprises invests a lot of money in R&D, and as a result it retains an

Question

Hofmann Enterprises invests a lot of money in R&D, and as a result it retains and reinvests all of its earnings instead of paying dividends. A pension fund manager is interested in purchasing Hofmann’s stock and has estimated its free cash flows for the next 3 years as follows: $2 million, $6 million, and $9 million. After the 3rd year, FCF is projected to grow at a constant 5 percent. Hofmann’s WACC is 7 percent, its debt and preferred stock total $100 million, and it has 8 million shares of common stock outstanding. What is the value of Hofmann’s stock price?

Please explain step by step to easy to understand please.

Please dont leave any steps out.

Explanation / Answer

Firm Value = S Operating Free Cash Flowst                                     (1+WACC)t Period OFCF Calculation Amount Present Value 1 OFCF1 2 2                     1.87 2 OFCF2 6 6                     5.24 3 OFCF3 9 9                     7.35 4 OFCF4 9*1.05 9.45 472.5 385.7007 NPV                 400.16 To calculate the firm value we first calculate the free cash flows of the company After calculating the free cash flows we discount it using WACC in Above table we have calculated present value of free cash flows for 4 years in Column Name " Present Value" Finally we have calculated Firm value using below formula Firm Value = S Operating Free Cash Flowst                                     (1+WACC)t

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.