Arnold Corporation currently has a free cash flow (FCF) of $15 million. A reputable analyst estimates that this FCF is anticipated to increase by 10% per year for the next 5 years. The analyst estimates that at the end of 5 years the company's terminal value will be based on the year 5 FCF and a long-tem rate FCF growth rate of 6%. 

Suppose the Arnold's b=1.5, the rf = 3%, the market risk premium [E(rM) - rf ]= 14%, and Arnold has 8 million shares outstanding, How shoud the analyst value the shares of the company? Assume all cash flows occur at year-end.

https://docs.google.com/spreadsheets/d/1aL9EELa4alxMvIaZceLJ6Z-N0T6b2XQSsfI9LsWhyMI/edit?usp=sharing

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B 4 5 5 7 B 9 01234 5 WNTO60vas 7 8 9 1 2 3 4567ao- 8 9 0 1 A B E(rm)-rf WACC Current FCF Anticipated growth rate, years 1-5 Beta, B rf Long-term growth rate, after year 5 Number of shares outstanding Year 1 2 3 ARNOLD CORPORATION 15,000,000 4 5 Terminal value calculation FCF in year 5 Terminal value Valuing Arnold Corporation Present value of FCFS, years 1-5 Present value of terminal value Value of Arnold Per share value 10% 1.5 3% 14% 6% 8,000,000 Anticipated FCF B 4 5 5 7 B 9 01234 5 WNTO60vas 7 8 9 1 2 3 4567ao- 8 9 0 1 A B E(rm)-rf WACC Current FCF Anticipated growth rate, years 1-5 Beta, B rf Long-term growth rate, after year 5 Number of shares outstanding Year 1 2 3 ARNOLD CORPORATION 15,000,000 4 5 Terminal value calculation FCF in year 5 Terminal value Valuing Arnold Corporation Present value of FCFS, years 1-5 Present value of terminal value Value of Arnold Per share value 10% 1.5 3% 14% 6% 8,000,000 Anticipated FCF

Answer rating: 100% (QA)

To value the shares of Arnold Corporation the analyst needs to calculate the present value of the anticipated free cash flows FCFs for years 15 and th... View the full answer