3. Corporate value model Aa Aa Ward Pharmaceuticals is expected to generate free

Question

3. Corporate value model Aa Aa Ward Pharmaceuticals is expected to generate free cash flow (FCF) of $150 million this year (FCF1$150 million), and FCF is expected to grow at a rate of 20% over the following two years (FCF2 and FCF3). After the third year, however, FCF is expected to grow at a constant rate of 5% per year, forever (FCF4). If ward's weighted average cost of capital (WACC )is 11.3%, what is ward's current total firm value? O $2,999 million O $2,820 million O $3,048 million O $2,952 million O $3,258 million ward's debt has a market value of $1,800 million and ward has no preferred stock. If ward has 80 million shares of common stock outstanding, what is Ward's estimated intrinsic value per share of common stock? O $15.60 O $16.22 O $13.83 $12.74 O $14.99

Explanation / Answer

FCF1=$150million

FCF2=(150*1.2)=$180million

FCF3=(180*1.2)=$216million

Value after year 3=(FCF3*Growth rate)/(WACC-Growth rate)

=(216*1.05)/(0.113-0.05)=$3600million

Hence current total firm value=Future FCF*Present value of discounting factor(11.3%,time period)

=150/1.113+180/1.113^2+216/1.113^3+3600/1.113^3

=$3048 million(Approx)

Intrinsic value=(3048-1800)/80

=$15.60(Approx)

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

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