Question
Free cash flow valuation. Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment
| Free 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 firms common stock value. The firms CFO has gathered data for performing the valuation using the free cash flow valuation model. The firms weighted average cost of capital is 11%, and it has $1,500,000 of debt and $400,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024, are given below. Beyond 2024 to infinity, the firm expects its free cash flow to grow by 3% annually. Answer A,B,C | |||||||||
| Year (t) | Free cash flow (FCFt) | ||||||||
| 2020 | $200,000 | ||||||||
| 2021 | 250,000 | ||||||||
| 2022 | 310,000 | ||||||||
| 2023 | 350,000 | ||||||||
| 2024 | 390,000 | ||||||||
| Solution | |||||||||
| a. | Estimate the value of Nabor Industries entire company by using the free cash flow valuation model. | ||||||||
| Weighted average cost of capital ANSWER: | |||||||||
| Constant growth rate ANSWER: | |||||||||
| Forecasted FCF2020 ANSWER: | |||||||||
| Forecasted FCF2021 ANSWER: | |||||||||
| Forecasted FCF2022 ANSWER: | |||||||||
| Forecasted FCF2023 ANSWER: | |||||||||
| Forecasted FCF2024 ANSWER: | |||||||||
| Forecasted FCF2025 ANSWER: | |||||||||
| Present value of FCF2020 ANSWER: | |||||||||
| Present value of FCF2021 ANSWER: | |||||||||
| Present value of FCF2022 ANSWER: | |||||||||
| Present value of FCF2023 ANSWER: | |||||||||
| Present value of FCF2024 ANSWER: | |||||||||
| Present value of FCF2025 thru ANSWER: | |||||||||
| Nabor Industries entire value today ANSWER: | |||||||||
| b. | Use your finding in part a, along with the data provided above, to find Nabor Industries common stock value. | ||||||||
| Value of Nabor Industries Debt ANSWER: | |||||||||
| Value Nabor Industries Preferred Stock ANSWER: | |||||||||
| Value Nabor Industries Common Stock ANSWER: | |||||||||
| c. | If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share? | ||||||||
| Value Nabor Industries Common Stock ANSWER: | |||||||||
| Shares of common stock outstanding ANSWER: | |||||||||
| Value per share of common stock ANSWER: | |||||||||
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