Question
At the beginning of its fiscal year 2021, an analyst made the following forecast for BBB Company, for 2021-2024 (in millions of dollars) 2020 2021
At the beginning of its fiscal year 2021, an analyst made the following forecast for BBB Company, for 2021-2024 (in millions of dollars)
| 2020 | 2021 | 2022 | 2023 | 2024 |
Cash flow from operations |
| 1300 | 1380 | 1420 | 1430 |
Cash investment in operations |
| 300 | 330 | 320 | 280 |
The free cash flow will remain at 2024 level after 2024. This company has $40 million in short-term debt and $60 million in long-term debt at the end of 2020. The weighted average cost of capital is 5%. The company has 100 million shares outstanding at the end of 2020.
A. Estimate the intrinsic value of BBB Company at the end of year 2020. (20 marks)
B. If the trading price of BBB Companys share is $20/share, what recommendation would you make to your clients? Why? (5 marks)
C. What is the intrinsic value of BBB Company at the end of year 2023, provided that the short-term and long-term debt, the outstanding shares and cost of capital in 2023 remain the same as 2020 (20 marks).
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