Valeant Pharmaceuticals (VRX) has 187m shares outstanding, $26.7 billion in debt and $807m in cash. It projects free cash flows for next 2 years based on earnings forecasts below, a marginal tax rate of 24%, capital expenditures increasing from $175m in Year 1 to $190m by Year 2, and increases in net working capital (NWC) are based on a NWC-to-Sales ratio of 5% per year.

 

  Forecasts ($m)                    Year 0            Year 1        Year 2 

  Sales                                    $10,287          $13,095      $14,117 

  Growth vs Prior Year                                  27.3%         7.8%

  Cost of Goods Sold                                  ($3,274)      ($3,529)

  Gross Profit                                                $9,822         $10,588 

  Other Operating Expenses                     ($262)         ($282)

  SG&A                                                         ($2,619)       ($2,823)

  Depreciation                                              ($171)           ($171)

  EBIT                                                             $6,770         $7,311 

   

(a)   Determine VRX's free cash flow each year. (10 points)

   

(b)  Suppose VRX's free cash flow is expected to grow at 1% after Year 2. If VRX's weighted average cost of capital (WACC) is 16.7%, What is the value of VRX's stock?