Video transcript: Dantzler Corporation is a fast growing supplier of office products. Analysts projected the following free cash flows during the next three years after which free cash flow is expected to grow at a constant 5% rate. The weighted average cost of capital is 11%. Part A. What is the horizon or continuing value? Part B. What is the firm's value today? And part C. Given that they have $112.6 million of debt, and 25 million shares of stock outstanding, what is the estimate of the current price per share? The weighted average cost of capital is 11%, and beyond year 3 we have a constant growth rate equal to 5%. Let's start with the calculation of the horizon or continuing value. Given that the free cash flows are going to grow at a constant growth rate after year 3, the horizon value is the value at year 3. That should be equal to free cash flow number 4 divided by the weighted average cost of capital, minus the growth rate. So we're able to find the value of free cash flows, starting with free cash flow number 4, all the way through infinity. We're able to find their value at the end of year 3. Recall here the assumption is that beyond year 3 the growth rate is less than the weighted average cost of capital. We have a growth rate of 5% which is below the 11% weighted average cost of capital. So that part is fine. The other thing that we have to make sure is that this is the projected growth rate beyond year 3 forever. So that's a perpetual constant growth rate of 5% which is the assumption here. So the terminal value is equal to free cash flow number 4 which is free cash flow number 3 times 1 plus the 5% growth rate. Divide that by the weighted average cost of capital, 11%, minus the growth rate, 5%. Free cash flow number 4 is $47.25 million. Divide that by 11% minus 5%. That is 6% or 0.06. So that gives us a terminal value equal to $787.5 million. That's our horizon value at the end of year 3. $787.5 million. What is the firm's value today? The value of the firm today is equal to the sum of the present values of the expected free cash flows. The present value of the first free cash flow, negative 11 divided by 1 plus the weighted average cost of capital to the power 1. After that, the present value of the second projected free cash flow, $17 million, divided by 1 plus the weighted average cost of capital to the power 2. The present value of the third free cash flow which is $45 million divided by 1 plus the weighted average cost of capital to the power 3. Then we'll find the present value of the horizon value. The horizon value is 787.5. That's the horizon value at the end of year 3. So discounted at the weighted average cost of capital for 3 years, and added to the present values of the first 3 free cash flows. This is equal to negative 9.9099 plus 13.7976 plus 32.9036 plus 575.8132. So the value of the firm today is equal to $612.6 million. Again, the firm value today, we calculated that to be equal to $612.6 million. And this was based on the value of the firm being equal to the sum of the present values of the expected free cash flows. The firm has $112.6 million of debt, and 25 million shares of stock outstanding. So, if you think of this in terms of the balance sheet, on the right-hand side of the balance sheet we have debt, and we have equity. The value of debt is $112.6 million. This debt and equity is funding our operations, and based on those operations we are generating free cash flows, and the sum of the present values of all those free cash flows is the value of the firm which is $612.6 million. So if you now want to find the value of equity, well, it is going to be equal to the value of the firm minus the value of debt. So equity is equal to $612.6 million minus $112.6 million. So the value of equity is equal to $500 million. And, given that we have 25 million shares outstanding, what is the price per share? It is the total value of common equity, $500 million, divided by the number of shares, 25 million, which gives us a price per share equal to $20.

The following table shows projected free cash flows for the next three years for Care4UMed Corp., a company producing portable oxygen machines. After the three year period, Care4UMed is expected to grow at a constant rate of 8% and its WACC is 13%. Care4UMed has $15 million of debt and $210 million shares of stock outstanding. According to the video, what is the formula for Care4UMed's horizon value? HV3HV3HV3HV3=WACCgFCF4=1+WACCFCF4=FCF5(1+g)3=(WACCg)3FCF4 Care4UMed's horizon value is million. According to the video, what is the formula for the firm's value today? V0V0V0V0=(1+WACC)1FCF1+(1+WACC)2FCF2+(1+WACC)3FCF3+HV3=(1+WACC)1FCF1+(1+WACC)2FCF2+(1+WACC)3FCF3+(1+WACC)4HV3=(1+WACC)1FCF1+(1+WACC)2FCF2+(1+WACC)3FCF3+(1+WACC)3HV3=(1+WACC)4HV3 Care4UMed's value today is million. According to the video, the value of equity is found as Care4UMed's equity is million. According to the video, the price per share is found as Care4UMed's the price per share is