Problems: Use the following information to answer the question(s) below. Company
ID: 2777947 • Letter: P
Question
Problems:
Use the following information to answer the question(s) below.
Company
Ticker
Price
per Share
Earnings
per Share
Book Value
per Share
Abbott Labs
ABT
54.35
3.69
13.79
Bristol-Myers-Squibb
BMY
25.45
1.93
7.33
GlaxoSmithKline
GSK
41.3
3.15
6.03
Johnson & Johnson
JNJ
62.6
4.58
18.27
Merck
MRK
36.25
3.81
10.86
Pfizer
PFE
$18.30
$1.20
8.19
Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:
After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price.
Company
Ticker
Price
per Share
Earnings
per Share
Book Value
per Share
Abbott Labs
ABT
54.35
3.69
13.79
Bristol-Myers-Squibb
BMY
25.45
1.93
7.33
GlaxoSmithKline
GSK
41.3
3.15
6.03
Johnson & Johnson
JNJ
62.6
4.58
18.27
Merck
MRK
36.25
3.81
10.86
Pfizer
PFE
$18.30
$1.20
8.19
Explanation / Answer
Part A)
The enterprise value today is the sum of present value of all the free cash flows in the coming year and value at the end of Year 4. The enterprise value today can be determined with the use of following formula:
Enterprise Value = FCF Year 1/(1+WACC)^1 + FCF Year 2/(1+WACC)^2 + FCF Year 3/(1+WACC)^3 + FCF Year 4/(1+WACC)^4 + FCF Year 5/(1+WACC)^4*(WACC - Growth Rate)
____________
Using the information provided in the question, we get,
Enterprise Value = 53/(1+14%)^1 + 68/(1+14%)^2 + 78/(1+14%)^3 + 75/(1+14%)^4 + 82/(1+14%)^4*(14% - 4%) = $681.37 or $681 (answer)
___________________
Part B)
The share price can be calculated with the use of following formula:
Share Price = (Enterprise Value + Excess Cash - Debt)/Number of Outstanding Shares
____________
Using the enterprise value calculated above and other information provided in the question, we get,
Share Price = (681 + 0 - 300)/40 = $9.525 or $9.53 (answer)
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