Terminal value refers to the valuation attached to the end of the planning period; it captures the value of all subsequent cash flows. Estimate the value today for each of the following sets of future cash flow forecasts.
a. Claymore Mining Company anticipates that it will earn firm FCFs of $ 4 million per year for each of the next five years. Beginning in year 6, the firm will earn FCF of $ 5 million per year for the indefinite future. If Claymore’s cost of capital is 10%, what is the value of the firm’s future cash flows?
b. Shameless Commerce Inc. has no outstanding debt and is being evaluated as a possible acquisition. Shameless’s FCFs for the next five years are projected to be $ 1 million per year, and, beginning in year 6, the cash flows are expected to begin growing at the anticipated rate of inflation, which is currently 3% per annum. If the cost of capital for Shameless is 10%, what is your estimate of the present value of the FCFs?
c. Dustin Electric Inc. is about to be acquired by the firm’s management from the firm’s founder for $ 15 million in cash. The purchase price will be financed with $ 10 million in notes that are to be repaid in $ 2 million increments over the next five years. At the end of this five-year period, the firm will have no remaining debt. The FCFs are expected to be $ 3 million a year for the next five years. Beginning in year 6, the FCFs are expected to grow at a rate of 2% per year into the indefinite future. If the unlevered cost of equity for Dustin is approximately 15% and the firm’s borrowing rate on the buyout debt is 10% (before taxes at a rate of 30%), what is your estimate of the value of the firm?