SolarCity retained investment bank Lazard Freres & Co. LLC to help with its valuation and help it evaluate Tesla's offer. SolarCity management projections of net cash flow ($millions):

FY2016 FY2017 FY2018 FY2019 FY2020

$161 $290 $454 $499 $635

Lazard estimated SolarCity's enterprise value as the present value of net cash flow for 2016 - 2020 plus a terminal value, assuming a discount rate WACC of 10.5% and a perpetuity growth rate of 1.5%. SolarCity's equity value was then estimated by subtracting from enterprise value the face value of net debt (debt minus cash), $3.4 billion. SolarCity had 98.3 million shares outstanding.

What is SolarCity's stock price implied by these projections? What is SolarCity's stock price before the merger announcement? Do you believe that SolarCity is undervalued? How does your calculation compare with Tesla's offer value per share?

For simplicity, assume the valuation date is the beginning of the fiscal year 2016 and all cash flows will be realized at the end of the corresponding fiscal year.

Answer rating: 100% (QA)

First lets compute the present value of SolarCitys net cash flow for 2016 to 2020 using the given as... View the full answer