Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests

Question:

Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett’s stock. The pension fund manager has estimated Barrett’s free cash flows for the next 4 years as follows: $3 million, $6 million, $10 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barrett’s WACC is 12%, its debt and preferred stock total $60 million, and it has 10 million shares of common stock outstanding.

a. What is the present value of the free cash flows projected during the next 4 years?

b. What is the firm’s terminal value?

c. What is the firm’s total value today?

d. What is an estimate of Barrett’s price per share?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...