Free Cash Flow Valuation Nabor Industries is considering going public but is uns
ID: 2772076 • Letter: F
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: beyound 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.
A. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.
b. Use your findings 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?
Year (t) Free cash flow (FCFt) 2016 $200,000 2017 250,000 2018 310,000 2019 350,000 2020 390,000Explanation / Answer
Solution:
A.
To calculate the value of Nabor industries, we need to first find the present values of FCF generated by discounting at WACC for the company. Then we ned to calculate the terminal value of the company by using perpetual growth formula at year 2020. The terminal value is also discounted to calculate the present value and then the final value of firm would be equal to sum of present values of FCF and present values of terminal value.
WACC (K) = 11%
Terminal value of firm = FCF* (1+g)/(K-g), where g = 3%
Hence terminal value = 390,000 * (1+5%)/(11%-5%)
= $5,021,250.00
Present value of terminal value = 5,021,250 * 0.593 = $2,979,867.48 ------------ (b)
Hence, value of the company = (a) + (b)
= $4,051,624.46
B) Enterprise value of firm = $4,051,624.46
Debt = $1,500,000
Preferred stock = $400,000
Hence, Common stock value = Enterprise value - Debt - Preferred stock
= 4,051,624.46 - 1,500,000 - 400,000
= $2,151,624.46
Hence Nabor industries's common stock value = $2,151,624.46
C) Number of shares = 200,000
Value per share = Common stock value / Number of shares
= 2,151,624.46/ 200,000
= $10.76
Hence, estimated value per share = $10.76
Year 2016 2017 2018 2019 2020 Period (n) 1 2 3 4 5 FCF ($) 200,000 250,000 310,000 350,000 390,000 Discounting factor (DF) (1/(1+k)^n) 0.900 0.811 0.731 0.658 0.593 Present values (FCF * DF) 180,180.18 202,905.61 226,669.33 230,555.84 231,446.02 Sum of present values ($) ------------- (a) 1,071,756.98Related Questions
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