You forecast that it will have free cash flow of £5 million one year from now (t=1), which will grow by 6% per year thereafter over the next 9 years, up to and including the free cash flow in ten years' time (t = 10), in a high growth stage? After this, you forecast that the free cash flow will grow at 1% afterwards (forever), in a low growth stage. The firm's Weighted Average Cost of Capital (WACC) is estimated to be 11%:

 

a. Using the above information, work out the terminal Enterprise Value of the low growth stage free cash flows, at the start of the low growth stage, evaluated in ten years' time (i.e. at t = 10)

 

b. Next, work out the present value of this Terminal Value, evaluated at the present time (i.e. at t = 0)?

 

c. Calculate the Enterprise Value of the free cash flows of the high growth stage, evaluated at the present time (i.e. at t = 0)?

 

Edinburgh plc has just been through a round of fundraising, and so has a lot of cash on its balance sheet. It has total debt of £2 million, total cash of £42 million, and 1 million shares in issue?

 

 d. Work out the Equity Value per share of Edinburgh plc at the present time (i.e. at t=0), using this information?

 

 e. You forecast that Edinburgh plc will pay an annual dividend for the first time in ten years' time. Would you consider valuing Edinburgh plc using a Dividend Discount Model? Why?

Answer rating: 100% (QA)

a To calculate the terminal Enterprise Value of the low growth stage free cash flows at the start of the low growth stage t 10 we can use the perpetui... View the full answer