Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please show how to solve step by step with instructions and what formulas in Excel to use. Thank you. Powder Puffs sells pom-poms to schools

Please show how to solve step by step with instructions and what formulas in Excel to use. Thank you.

Powder Puffs sells pom-poms to schools internationally. It has an offer from a private buyer and the owners would like to know the value of each share of common equity so they don't undervalue their shares. The cost of capital for this firm is 6.65% and there are 60,797 common shares outstanding. The firm does not have any preferred equity, however, it has outstanding debt with a market value of $3,833,340. Use the DCF valuation model based on the expected FCFs shown below; year 1 represents one year from today and so on. The company expects to grow at a 2.2% rate after Year 5. Rounding to the nearest penny, what is the value of each share of common stock?

Period Free Cash Flow Year 1 $923,560 Year 2 $1,156,772 Year 3 $1,629,650 Year 4 $2,767,362 Year 5 $3,170,908

Answer: 931.14

How: 1. Value of operations using the DCF & cost of capital as the rate (use the decimal of the cost of capital for example 6.9% =.069) In Excel use the NPV formula =npv(cost of capital, YR1 CF, YR2 CF, YR3 CF, YR 4CF, YR5 CF) = PV of the cash flows Next, add the terminal value to the Cash flow value: Calculate the terminal value by a. multiplying year 5 cash flow by 1+growth rate to get the next year's value b. divide the next year's value by (cost of capital - growth rate) Note: use the decimal of the interest rates. c. bring the value to the present by calculating the PV. In Excel =pv(rate,years,0,-FV) where the rate is the cost of capital, years is 5, 0 payment, and the FV is the negative of the value calculated in b. The terminal value + pv of cash flows = operating value

2. Equity value = operating value - debt; subtract the debt from the operating value calculated above. 3. Value per share = Equity value calculated in 2 divided by the number of shares outstanding.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance For Dummies

Authors: Michael Taillard

2nd Edition

1119850312, 978-1119850311

More Books

Students also viewed these Finance questions

Question

9. Describe the characteristics of power.

Answered: 1 week ago

Question

10. Describe the relationship between communication and power.

Answered: 1 week ago