The second acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. KFS expects the company to produce free cash flows of −$5 million in 1 year, $10 million in 2 years, and $20 million in 3 years. After 3 years, free cash flow will grow at a rate of 6%. The target’s WACC is 10% and it currently has 10 million shares of stock outstanding.
(1) What is the company’s horizon value (i.e., its value of operations at Year 3)? What is its current value of operations (i.e., at Time 0)?
(2) What is its intrinsic value of equity on a price-per-share basis?