Question
It is December 2021. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition
It is December 2021. You work as a financial analyst for Merck & Co. and are tasked with the due diligence on the proposed acquisition of a biotech startup. You estimated the following cash flows for the startup:
Year | Expected free cash flow ($ million) (end of year) |
2022 | 80.5 |
2023 | 120.75 |
2024 | 156.98 |
2025 | 188.37 |
2026 | 207.21 |
After 2026, cash flows are expected to grow by 5% per year. Based on the riskiness of your industry, you think that your weighted average cost of capital is 14%.
The biotech firm has 5 million shares and bonds worth $120 million outstanding.
Attempt 1/10 for 10 pts.
Part 1
What is the terminal value, i.e., the present value of all free cash flows from 2027 to infinity expressed in 2026-dollars (in $ million)?
Correct
Since we are only given the free cash flows for the next five years, we need to find the terminal value, i.e., the present value of all free cash flows from years 2027 to infinity:
V=FCF20271+KW+FCF2028(1+KW)2+...
We can use the formula from the dividend growth model to find the (2026) present value:
V=FCF2026(1+g)KWg
= 207.21(1+0.05)0.140.05
= 2,417 (million)
Attempt 1/10 for 10 pts.
Part 2
What is the total value of the company (in $ million)?
Submit
Attempt 1/10 for 10 pts.
Part 3
What is the value per share of common stock (in $)?
Submit
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