Decker Tires’ free cash flow was just FCF0 = $2.32. Analysts expect the company\

Question

Decker Tires’ free cash flow was just FCF0 = $2.32. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. Decker has $4 million in short-term investments and $13 million in debt and 1.5 million shares outstanding. Please show work:

What is the current value of operations for Decker?

What is the best estimate of the stock's current intrinsic price? (Choices are $48.12, $41.49, $46.57, $43.29, $45.03)

Explanation / Answer

FCF for year 1=(2.32*1.3)=3.016

FCF for year 2=(3.016*1.1)=3.3176

Value after year 2=(FCF for year 2*Growth rate)/(WACC-Growth rate)

=(3.3176*1.05)/(0.09-0.05)=$87.087

Hence current total value=Future FCF*Present value of discouniting factor(9%,time period)

=3.016/1.09+3.3176/1.09^2+87.087/1.09^2

=$78.86 million(Approx)

Hence value of equity=(78.86+4-13)=$69.86million(Aprox)

Hence current intrinsic value=(69.86/1.5)=46.57(Approx)

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