Free cash flow valuation Nabor Industries is considering going public but is unsureof a fair

offering price for the company. Before hiring an investment banker to assist in making the public
offering, managers at Nabor have decided to make their own estimate of the firm’s common
stock value. The firm’s CFO has gathered data for performing the valuation using the free cash
flow valuation model.

The firm’s weighted average cost of capital is 11%, and it has $1,500,000 of debt at market
value and $400,000 of preferred stock at its assumed market value. The estimated free cash
flows over the next 5 years, 2013 through 2017, are given below. Beyond 2017 to infinity, the
firm expects its free cash flow to grow by 3% annually.

a. Estimate the value of Nabor Industries’ entire company by using the free cash

flow valuation model.

Value of FCF2018∞ = FCF2018 ÷ (ra – gFCF)

= [$390,000 × (1 + 0.03)] ÷ (0.11 – 0.03)

= $5,021,250
Total FCF2017 = $390,000 + $5,021,250 = $5,411,250

1 2 Present value of
Year (t)
FCFt (1 + ra)t FCFt
2013 $200,000 1.11 $180,180.18
2014 $250,000 1.2321 $202,905.61
2015 $310,000 1.367631 $226,669.33
2016 $350,000 1.51807041 $230,555.84
2017 $5,411,250 1.685058155 $3,211,313.50
VC = $4,051,624.46

The value of Nabor Industries’ entire company is $4,051,624.46.

b. Use your finding in part a, along with the data provided above, to find Nabor

Industries’ common stock value.

Vs = $4,051,624.46 – $1,500,000 – $400,000 = $2,151,624.46

The common stock value of Nabor Industries is $2,151,624.46.

c. If the firm plans to issue 200,000 shares of common stock, what is its estimated

value per share?

Estimated value per share = $2,151,624.46 ÷ 200,000 = $10.76

The estimated vale per share is $10.76.