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Dozier Corp: Free Cash Flow Valuation

Microtech Corporation is expected to begin paying dividends of $1.00 in 3 years, growing at 50% per year for years 4 and 5, then at a constant 8% annually. To value the stock today at a 15% required return, the dividends for years 4 and 5 are calculated, then the horizon and present values are determined, yielding a stock value of $19.89. Dozier Corporation is projected to have free cash flows for the next 3 years, after which cash flow will grow at a constant 7%. Its WACC is 13%. Calculating the horizon value and present value gives the firm value as $527.8 million. With $100 million in debt and 10 million shares

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110 views14 pages

Dozier Corp: Free Cash Flow Valuation

Microtech Corporation is expected to begin paying dividends of $1.00 in 3 years, growing at 50% per year for years 4 and 5, then at a constant 8% annually. To value the stock today at a 15% required return, the dividends for years 4 and 5 are calculated, then the horizon and present values are determined, yielding a stock value of $19.89. Dozier Corporation is projected to have free cash flows for the next 3 years, after which cash flow will grow at a constant 7%. Its WACC is 13%. Calculating the horizon value and present value gives the firm value as $527.8 million. With $100 million in debt and 10 million shares

Uploaded by

USD 654
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

M

10-14 &
10-15
10-14
PROBLEM
NONCONSTANT GROWTH
PROBLEM
Microtech Corporation is expanding rapidly and
currently needs to retain all of its earnings; hence, it
does not pay dividends. However, investors expect
Microtech to begin paying dividends, beginning with
a dividend of $1.00 coming 3 years from today. The
dividend should grow rapidly—at a rate of 50% per
year—during Years 4 and 5; but after Year 5, growth
should be a constant 8% per year. If the required
return on Microtech is 15%, what is the value of the
stock today?
Dividend 3 years from Growth rate after
now $1.00 Year 5 8% per year
Constant

Growth rate during Year Required Return


50% per year
4 &5 15%
Find Dividend of Year 4 & 5

D4 = D3 (1+g) D5 = D4 (1+g)
= 1.00 (1+0.50) = 1.50 (1+0.50)
D4 =1.50 D5 = 2.25
Find Horizon Value
P5 =
=
 
P5 = 34.7143
Find Stock Value Today
P0 = + +
=++
= 0.6575 +0.8576 +1.1186 +17.2591
P0= $19.89
 
10-15
PROBLEM
CORPORATE VALUATION
PROBLEM
Dozier Corporation is a fast-growing supplier of
office products. Analysts project the following free
cash flows (FCFs) during the next 3 years, after
which FCF is expected to grow at a constant 7% .
Dozier’s WACC is 13%
After 3 years growth rate WACC
Constant 7% 13%
1. Find Horizon Value
2. Find Firm’s Value Today
3. Current Price per share if it has a
debt of 100Million and 10Million
outstanding shares.
Find Horizon Value
Horizon Value =
=

 
Horizon Value =
713,333,333.33
Find Firm’s Value Today
P0 = + +
=++
= -17,699,115.04+23,494,400.50 +27,722,006.49 + 494,375,782.42
P0= $527,893,074.37
 
Find Current Price per Share
Debt Number of Outstanding Shares
$100 Million 10 Million

Price per Share =


=
=
Price per Share = $42.79
 

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