Your firm is considering purchasing firm Z and they have asked for your help in valuing it. You are struggling a bit because of the uncertain prospects for this industry. Firm Z most recently generated FCF of $30M last year, but you are uncertain of what might happen over the next few years. Specifically, your company’s sales team thinks that it is 40% likely that firms in the industry will grow by 6% this year and for 4 years after that, and 60% likely that they will only grow at 4%. After that, you estimate that firms in the industry, and consequently firm Z, will continue to grow at 2.5% in perpetuity. Firm Z’s cost of capital is 10%. For simplicity, assume that all past cash flows have been paid out as dividends.

1. What is the value of firm Z as of today?

2. Looking at firm Z’s balance sheet, you recognize that they have $150M in debt, and 20M shares outstanding. What is the value of each share, according to your analysis?

3. Suppose you revise your long term growth rate downward, and now believe that firm Z’s growth rate beyond year 5 will only be 1.5%. What is the percent reduction in enterprise value as a result of the lower growth rate? What about the percent change in your estimate share price?

Answer rating: 100% (QA)

a Recent FCF 30 million Growth rate g 25 Cost of capital r 10 Value of the firm FCF 1grg 30 1025... View the full answer