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Your company is evaluating a purchase of Skeksis Crystal Mining LLC. Skekis produced free cash flow of...

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Finance

Your company is evaluating a

purchase of Skeksis Crystal Mining LLC. Skekis produced

free cash flow of $7.3m last year, and this is expected to growat 11% for the next five

years before leveling off to a long term growth rate of 2%. Yourcompany has a cost of

capital of 10%, while Sk

eksis has a cost of capital of 13%. Skeksis has 3 millionshares

outstanding and $25m in debt. What would be the highest priceyou would pay per share

of Skeksis’ stock?

Answer & Explanation Solved by verified expert
4.2 Ratings (525 Votes)

WACC= 13.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 7.3 11.00% 8.103 8.103 1.13 7.1708
2 8.103 11.00% 8.99433 8.99433 1.2769 7.04388
3 8.99433 11.00% 9.9837063 9.9837063 1.442897 6.91921
4 9.9837063 11.00% 11.08191399 11.08191399 1.63047361 6.80
5 11.08191399 11.00% 12.30092453 114.063 126.3639245 1.842435179 68.59
Long term growth rate (given)= 2.00% Value of Enterprise = Sum of discounted value = 96.52
Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor
Enterprise value = Equity value+ MV of debt
96.52 = Equity value+25
Equity value = 71.52
share price = equity value/number of shares
share price = 71.52/3
share price = 23.84

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Transcribed Image Text

Your company is evaluating apurchase of Skeksis Crystal Mining LLC. Skekis producedfree cash flow of $7.3m last year, and this is expected to growat 11% for the next fiveyears before leveling off to a long term growth rate of 2%. Yourcompany has a cost ofcapital of 10%, while Skeksis has a cost of capital of 13%. Skeksis has 3 millionsharesoutstanding and $25m in debt. What would be the highest priceyou would pay per shareof Skeksis’ stock?

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