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 (FCF! $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 11.4%, what is ward's current total firm value? O $2,778 million $3,150 million O $3,048 million O $3,098 million O $2,999 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 $16.22 O $15.60 $12.74 O $14.99 O $14.40

Explanation / Answer

Option $3,150 is correct EPS Dis fact PV FCF1                                  150.0 150 1 1      150.00 FCF2                                  180.0 180 1/(1+.114) 0.897666      161.58 FCF3                                  216.0 FCF4/(WACC-g) =226.8/(0.114-0.05) 3543.75 1/(1+.114)^2 0.805804 2,855.57 FCF4                                  226.8 NPV 3,167.15 WACC=11.4% g=5% Option $16.22 is correct Value of the firm 3150 Million Market value of Debt -1800 Million Value of the stock 1350 Million No of shares 80 Million Value per share                      16.88

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