Assignment Chapter 7

P7-15Free cash flow valuation

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2013 through 2017, are given below. Beyond 2017 to infinity, the firm expects its free cash flow to grow by 3% annually.

\f\fGallinas Industries Balance Sheet December 31 Assets Liabilities and Stockholders' Equity Cash $ 40,000 Accounts payable $100,000 Marketable securities 60,000 Notes payable 30,000 Accounts receivable 120,000 Accrued wages 30,000 Inventories 160,000 Total current liabilities $160,000 Total current assets $380,000 Longterm debt $180,000 Land and buildings (net) $150,000 Preferred stock $ 80,000 Machinery and equipment 250,000 Common stock (10,000 shares) 260,000 Total fixed assets (net) $400,000 Retained earnings 100,000 Total assets $780,000 Total liabilities and stockholders' equity $780,000