Geo Telecommunications Inc. is a fast growing company with a double-digit growth rate that is expected to continue for three more years. In his pursuit of valuing the company’s stock, Dimiter Nenkov, a free-lance equity analyst, has compiled the following data about the company: Current year’s free cash flow to equity €20 million Growth rate in free cash flow during the next three years 30% in years 1 and 2 20% in year 3 Growth rate in free cash flow for year 4 and beyond 8% Weighted average cost of capital 12% Cost of equity capital 15% Number of outstanding shares 50 million Based on the above information, Nenkov’s best estimate of the value per share for Geo Telecommunications would be closest to: Please show calculations… A. € 9.72. B. € 10.13. C. € 17.17. D. € 17.57.
CF0=0 CF1=20*1.3, F1=1 CF2=20*1.3^2, F2=1 CF3=20*1.3^2*1.2+625.78 Calculate FCFE in year 4 and determine fair value of the company at year 3 and add it to CF3 20*1.3^2*1.2*1.08/(.15-.08)=625.78 Hit NPV, with I=15, PV or the firm’s fair value today = 486.3 BV/share = 486.3/50=9.7259, I’d say A I thought about using WACC but since this is FCFE, must be Cost of equity as discount rate.
map, can you explain better CF3 and CF4, what you are putting in your calculator? I am missing something everytimet i do what of these and I am determined to nail it.
Can some one explain this prob…I am having troubles !!
In CF1 put the expected FCFE in 1 year In CF2 put the expected FCFE in 2 year in CF3 put the expected value of the FCFE in year 3 and add how much would the fair value of the company be at that time, using the DDM model, because growth stabilizes. To calculate the fair value on year 3, you have to calculate FCFE in year 4 and divide that by (cost of equity – the constant growth). This would give you the expected fair value of the firm , in year 3.
map1, I did that and got $670 at year 3, discounting to today using 15% I get $440 m, dividing by 50m I get $8.8 per share. In your calculation, you show 486.3 as the NPV of $625.78 (which you should also add the $43.8 FCF for year 3 to it) using 15% as discount rate, I don’t get the same numbers. Can you explain?
Okay, I am getting something different too: CF1 = 26 CF2 = 33.80 CF3 = 40.56 CF4 = 43.80/.07 = 625.78 NPV = 432.59, using 15% for I What did I screw up?
In CF3 you have: the CF3 of year 3, which is 20*1.3*1.3*1.2 AND the fair value in year 3, calculated using the DDM model (because growth has stabilized) = 20*1.3*1.3*1.2*1.08/(.15-.08), just as if you would calculate the price of stock in year 3, based on the dividend expected in year 4. But this would be the value in year 3, not in year 4. I bet you both left the CF4=fair value of the company:) don’t forget to add it to CF3
map1 Wrote: ------------------------------------------------------- > In CF3 you have: the CF3 of year 3, which is > 20*1.3*1.3*1.2 AND the fair value in year 3, > calculated using the DDM model (because growth has > stabilized) = 20*1.3*1.3*1.2*1.08/(.15-.08), just > as if you would calculate the price of stock in > year 3, based on the dividend expected in year 4. > But this would be the value in year 3, not in year > 4. > > I bet you both left the CF4=fair value of the > company:) don’t forget to add it to CF3 he calls it DDM, it is also called the terminal value, you add the terminal value to CF3 and discount it all @ 1.15^3 that is where he gets 625 from i do these on paper, not on calculator, but oh well