Barrett Industries invests a large sum of money in R&D; as a result, it retains

Question

Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4 years as follows: $2 million, $7 million, $11 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barrett's WACC is 9%, the market value of its debt and preferred stock totals $40 million, and it has 23 million shares of common stock outstanding.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent.

$  

What is the firm's horizon, or continuing, value? Round your answer to the nearest cent.

$  

What is the firm's total value today? Round your answer to the nearest cent.

$  

What is an estimate of Barrett's price per share? Round your answer to the nearest cent.

$  

Explanation / Answer

Answer 1

Present value of the free cash flows

Present value of the free cash flows => $26840000

Answer 2

Firm's horizon, or continuing, value => (15000000 + 7%) / ( 9% -7%)

Firm's horizon, or continuing, value=> $802500000

Answer 3

Firm's total value today => 1834000 + 5894000 + 8492000 + (802500000 * 0.708)

Firm's total value today => $584390000

Answer 4

Equity Value => 584390000 - 40000000

=> 544390000

Share price => 544390000 / 23000000

Share Price => $23.67

Year Cash Flows Discounting Factor@9% Present value 1 2000000 0.917 1834000 2 7000000 0.842 5894000 3 11000000 0.772 8492000 4 15000000 0.708 10620000 TOTAL 26840000

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