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?