Question
DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. by using the FCF and FCFE valuation approaches. DoPharm has collected the following information for the
DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. by using the FCF and FCFE valuation approaches. DoPharm has collected the following information for the current year:
Phaneuf has sales of $2,000 million with 40% operating margin, depreciation of $100 million, capital expenditures of $200 million, and an increase in working capital of $40 million.
Interest expenses are $50 million. The current market value of Phaneufs outstanding debt is $1,500 million. The company has retired the existing bonds for $100 million.
FCF and FCFE are expected to grow at 10% for the next five years and 6% after that.
The tax rate is 21%.
Phaneuf financed with 40% debt and 60% equity. Its before-tax cost of debt is 7.9%, and its cost of equity is 12.5 %. The number of shares outstanding is 100 million.
1. Estimate the current years free cash flow of Phaneuf in millions.
2. Estimate cost of capital of Phaneuf in %.
3. Based on the free cash flow approach, estimate firm value of Phaneuf in millions. Based on this approach, what is stock price of Phaneuf?
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