Fin – derby corporation problem

Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

 
 
 
 
 
 
 

INPUTS (In millions)
 
Year

 
 
Current
Projected

 
 
0
1
2
3
4

Free cash flow
 
 
-$20.0
$20.0
$80.0
$84.0

Marketable Securities
 
$40
 
 
 
 

Notes payable
 
$100
 
 
 
 

Long-term bonds
 
$300
 
 
 
 

Preferred stock
 
$50
 
 
 
 

WACC 
 
9.00%
 
 
 
 

Number of shares of stock
40
 
 
 
 

 
 
 
 
 
 
 

a.  Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow).

 
 
 
 
 
 
 

 
 
Current
Projected

 
 
0
1
2
3
4

Free cash flow
 
 
-$20.0
$20.0
$80.0
$84.0

Long-term constant growth in FCF
 
 
 
 
 

Horizon value
 
 
 
 
 
 

 
 
 
 
 
 
 

b.  Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations.

 
 
 
 
 
 
 

PV of horizon value
 
 
 
 
 
 

PV of FCF
 
 
 
 
 
 

Value of operations (PV of FCF + HV)
 
 
 
 
 

 
 
 
 
 
 
 

c.  Calculate the estimated Year-0 price per share of common equity.

 
 
 
 
 
 
 

Value of operations
 
 
 
 
 
 

Plus value of narketable securities
 
 
 
 
 

Total value of company
 
 
 
 
 

Less value of debt
 
 
 
 
 
 

Less value of preferred stock
 
 
 
 
 

Estimated value of common equity
 
 
 
 
 

Divided by number of shares
 
 
 
 
 

Price per share
 
 
 
 
 
 

 

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