Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ million) 53 68 78 75 82 After 5 years, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%: Estimate the enterprise value of Heavy Metal. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price.

Question

Business

Gideon Frederick

25 January, 12:39

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ million) 53 68 78 75 82 After 5 years, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%: Estimate the enterprise value of Heavy Metal. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price.

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Answers (1)

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Trent Chung · Answer 1

Enterprise Value of Heavy Metal = $820

Share price of Heavy Metal = $9.53

Explanation:

Base on the scenario been describe in the question, we can use the following method to solve the given problem.

a) Terminal Value

= 82 / (14% - 4%) = $820

Enterprise Value of Heavy Metal

Terminal Value = 53 / 1.14 + 68/1.14^2 + 78 / 1.14^3 + (75 + 820) / 1.14^4 = $681

b) Share price of Heavy Metal

= (Enterprise value + cash - Debt) / Shares outstanding

Share price of Heavy Metal = (681 + 0 - 300) / 40 = $9.53