Heavy Metal Corporation is expected to generate the following free cash flows ov

Question

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years Year 5 FCF ($ million) 53.5 66.8 76.5 76.1 81.1 Thereafter, the free cash flows are expected to grow at the industry average of 3.7% per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.9%; a. Estimate the enterprise value of Heavy Metal b. If Heavy Metal has no excess cash, debt of $316 million, and 35 million shares outstanding, estimate its share price.

Explanation / Answer

YEAR

( $MILLION)

FCF

DF (@13.95%)

( $MILLION)

DCF(FCF*DF)

81.1+ (81.1*3.7%) = 477.84

(3.9%+3.7%)

VALUE OF FIRM = $487.2359 million

DEBT COMPONENT = $316.00 million

VALUE OF EQUITY = VALUE OF FIRM - DEBT COMPONENT = $(487.2359 - 316.00) million

THEREFORE, VALUE OF EQUITY = $171.2359 million

NO. OF EQUITY SHARES = $35 million

VALUE OF SHARE = VALUE OF EQUITY/ NO. OF SHARES

= $(171.2359/35)million= $4.8925

YEAR

( $MILLION)

FCF

DF (@13.95%)

( $MILLION)

DCF(FCF*DF)

1 53.5 0.878 46.973 2 66.8 0.771 51.5028 3 76.5 0.677 51.7905 4 76.1 0.594 45.2034 5 81.1 0.522 42.3342 5

81.1+ (81.1*3.7%) = 477.84

(3.9%+3.7%)

0.522 249.432 SUM = 487.2359

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