Question
2) Suppose you have been asked to estimate the value of two privately held companies that dont pay any dividends. The first company is in
2) Suppose you have been asked to estimate the value of two privately held companies that dont pay any dividends. The first company is in a mature industry. The company currently has free cash flow of $24 million and it is expected to grow at a constant rate of 5%. Its WACC is 11%. The company owns marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity. It currently has 10 million shares of stock. The second company is in a growing industry. The company has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. It is expected that the company will produce free cash flows of $5 million in one year, $10 million in two years, and $20 million in three years. After three years, free cash flow will grow at a rate of 6%. Its WACC is 10% and it currently has 10 million shares of stock. Using the data provided, you are required to answer the following questions: a) Explain how to use the corporate valuation model to find the price per share of common equity.
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