Free Cash Flow Valuation

Exercise 1
Sino-i Technologies is expected to generate P145 million in free cash flow next year and FCF is expected
to grow at a constant rate of 6% per year indefinitely. Sino-i has no debt or preferred stock, and its
WACC is 12%. If Sino-i has 50 million shares of stock outstanding, what is the stock’s value per share?

Answer

Firm value = FCF1/(WACC – g)

= P145,000,000/(0.12 – 0.06)
= P2,416,666,667.

Equity value per share = Equity value/Shares outstanding

= P2,416,666,667/50,000,000
= P48.33.

Each share of common stock is worth P48.33, according to the corporate valuation model.

Exercise 2
TingHsin International Group is a fast-growing supplier of food products. Analysts project the following
free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate.
TingHsin’s WACC is 13%.

Year FCF
0 NA
1 -P20
2 P30
3 P40

Required:
a. What is TingHsin’s terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond
Year 3 discounted back to Year 3.
b. What is the firm’s value today?
c. Suppose TingHsin has P100 million of debt and 10 million shares of stock outstanding. What is your
estimate of the current price per share?

Answer
a. Terminal value = P40(1.07)/(0.13- 0.07) = P42.80/0.06 = P713.33 million.

b. 0 1 2 3 4
WACC = 13%
| | | | |
gn = 7%
-20 30 40 42.80
 1/1.13
(P 17.70)
 1/(1.13)2 V op
23.49 3 = 713.33
 1/(1.13) 3

522.10 753.33
P527.89

CF0 = 0; CF1 = -20; CF2 = 30; CF3 = 753.33; I/YR = 13; and then solve for NPV = P527.89
million.
 Free Cash Flow Valuation

c. Total valuet=0 = P527.89 million.

Value of common equity = P527.89 – P100 = P427.89 million.

Price per share = P427.89/10= P42.79.

Exercise 3
Barrett Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its
earnings. In other words, Barrett does not pay any dividends and it has no plans to pay dividends in the
near future. A major pension fund is interested in purchasing Barrett’s stock. The pension fund manager
has estimated Barrett’s free cash flows for the next 4 years as follows: P3 million, P6 million, P10
million, and P15 million. After the fourth year, free cash flow is projected to grow at a constant 7%.
Barrett’s WACC is 12%, its debt and preferred stock total P60 million, and it has 10 million shares of
common stock outstanding.
a. What is the present value of the free cash flows projected during the next 4 years?
b. What is the firm’s terminal value?
c. What is the firm’s total value today?
d. What is an estimate of Barrett’s price per share?

Answer
a. 0 1 2 3 4
| | | | |
3,000,000 6,000,000 10,000,000 15,000,000

Using a financial calculator, enter the following inputs: CF0 = 0; CF1 = 3000000; CF2 = 6000000;
CF3 = 10000000; CF4 = 15000000; I/YR = 12; and then solve for NPV = P24,112,308.

b. The firm’s terminal value is:

P15,000,000(1.07)/(0.12 – 0.07) = P321,000,000

c. The firm’s total value is calculated as follows:

0 1 2 3 4 5
WACC = 12%
| | | | | gn = 7%
|
3,000,000 6,000,000 10,000,000 15,000,000 16,050,000

16 , 050 , 000
PV = ? 321,000,000 = 0 .12−0 .07

Using your financial calculator, enter the following inputs: CF 0 = 0; CF1 = 3000000; CF2 =
6000000; CF3 = 10000000; CF4 = 15000000 + 321000000 = 336000000; I/YR = 12; and then
solve for NPV = P228,113,612.

d. To find Barrett’s stock price, you need to first find the value of its equity. The value of
Barrett’s equity is equal to the value of the total firm less the market value of its debt and
preferred stock.
 Free Cash Flow Valuation

Total firm value P228,113,612

Market value, debt + preferred 60,000,000 (given in problem)
Market value of equity P168,113,612

Barrett’s price per share is calculated as:

P168,113,612/10,000,000 = P16.81