Question

Nabor industries is considering going public but is unsure of a fair offering price for the company. 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 13%, and it has $2,000,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flow over next 3 years, 2004 through 2006, are given below. Beyond 2006 to infinity, the firm expects its free cash flow to grow by 4% annually.
Year (t) Free Cash Flow (FCF)
2004 $200,000
2005 $300,000
2006 $400,000
Estimate the value of Nabor industries' entire company by using the free cash flow valuation model.

a. $3,666,657.08

b. $3,289,999.80

c. $3,387,777.08

d. $3,287,689.08

e. $3,892,587.08

Answer 1

Answer:

e. $3,892,587.08

Explanation:

The value of Nabor Industries entire company using the free cash flows can be determined by calculating the present value of all free cash flows that will be occurred in the future in the following manner:

Present value of 2004 free cash flow                            $176,991.15

200,000(1+13%)^-1

Present value of 2005 free cash flow                            $234,944

300,000(1+13%)^-2

Present value of 2006 free cash flow                            $277,220.06

400,000(1+13%)^-3

Present value of cash flows after 2006                         $3,203,431.86

((400,000(1+4%))/(13%-4%))*(1+13%)^-3

Value of Nabor Corporation                                            $3,892,587.07

So based on the above calculations, our answer is e. $3,892,587.08