Question: It is December 2022. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition

It is December 2022. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition of a biotech startup. You estimated the following cash flows for the startup:

Year Expected free cash flow ($ million) (end of year)
2023 86.5
2024 129.75
2025 168.68
2026 202.41
2027 222.65

After 2027, cash flows are expected to grow by 3% per year. Based on the riskiness of your industry, you think that your weighted average cost of capital is 17%.

The biotech firm has 5 million shares and bonds worth $120 million outstanding.

Part 1

What is the terminal value, i.e., the present value of all free cash flows from 2028 to infinity expressed in 2027-dollars (in $ million)?

Part 2

What is the total value of the company (in $ million)?

Part 3

What is the value per share of common stock (in $)?

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