Ladwig Incorporated is considering whether to acquire Shocker Enterprises (SE). Estimate the per-share value of SE...

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Ladwig Incorporated is considering whether to acquire ShockerEnterprises (SE). Estimate the per-share value of SE using adiscounted FCF approach and the following data: • Debt: $75million
• Excess cash: $10 million
• Shares outstanding: 40 million
• Expected FCF: $20 million in each of the next five years,growing after that by 4 percent per year for the foreseeablefuture
• Weighted average cost of capital: 15 percent

Answer & Explanation Solved by verified expert

4.3 Ratings (712 Votes)

	WACC=	15.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	20		20	1.15	17.3913
2	20	0.00%	20		20	1.3225	15.12287
3	20	0.00%	20		20	1.520875	13.15032
4	20	0.00%	20		20	1.74900625	11.43506
5	20	0.00%	20	189.091	209.091	2.011357188	103.95518
	Long term growth rate (given)=	4.00%			Value of Enterprise =	Sum of discounted value =	161.05

Where
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

- Cash & Cash Equivalents

161.05 = Equity value+75-10

Equity value = 96.05

share price = equity value/number of shares

share price = 96.05/40

share price = 2.4

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Transcribed Image Text

Ladwig Incorporated is considering whether to acquire ShockerEnterprises (SE). Estimate the per-share value of SE using adiscounted FCF approach and the following data: • Debt: $75million• Excess cash: $10 million• Shares outstanding: 40 million• Expected FCF: $20 million in each of the next five years,growing after that by 4 percent per year for the foreseeablefuture• Weighted average cost of capital: 15 percent