Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / Gatekeeper Corp

Gatekeeper Corp

Finance

Gatekeeper Corp. is a fast-growing supplier of eccentric hair products. Internal analysts project the following free cash flows (FCFS), in millions of dollars, during the next 5 years, after which FCFs are expected to grow at a constant 4% rate. Gatekeeper's WACC is estimated to be 10%. (12) Year 4 Year 5 Year 1 Year 2 Year 3 -40 30 60 a. What is the current value of operations for Gatekeeper? 80 110 b. Suppose Gatekeeper has $25 million in marketable securities, 590 million in debt, and 15 million shares of stock. What is the intrinsic price per share estimate of Gatekeeper stock today? c. Suppose the aforementioned analyst projections were done by overly optimistic internal budgeting people, and you are a cautious, skeptical analyst who thinks that the initial projections might prove to be incorrect in the following ways: Actual permanent FCF growth after year 5 is only 2.5%...Actual WACC for years 2 and 3 stays at 10%, but the WACC for years 4 and beyond is 11%... The FCF generated in Year 5 is only 100, rather than 110. How much does your intrinsic price per share estimate of Gatekeeper stock change from that you initially estimated in part b?

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

Part (a)

Stage 1:

Year Free Cash Flows PVF @ 10% Present value of Cash Flows
1 -40 0.909 -36.36
2 30 0.826 24.78
3 60 0.751 45.06
4 80 0.683 54.64
5 110 0.621 68.31
      156.43

Stage 2:

Cash flows are expected to grow at 4% constantly after 5 years

so, we shall compute the value of the company at 4% growth

therefore, value at year end 5 = FCFF at year end 6/ (WACC- growth rate)

where FCFF at year end 6 = FCFF5 (1+growth rate)

WACC = weighted average cost of capital

hence, it is equal to 110(1+0.04)/(0.10-0.04)

=114.4/0.06

=1906.67

Present value of value at year end 5= Value at year end 5 * PVF (10%,5)

= 1906.67*0.621

=1184.04

FInal answer : Value of the company = Stage 1 + Stage 2

=156.43+1184.04

=1340.47 Final answer

Part (b) :

Particulars Amount ($ Million)
Value of company (as computed in part (a)) 1340.47
Less : Value of debt (90)
Value of Equity (A) 1250.47
Number of Equity shares (B) 15
Intrinsic value per share (A/B) 83.36

Part (c) :

Since the skeptical analyst believes that the initial projections might prove incorrect so, the value of the company will be as follows :

Intrinsic value today = Stage 1 + Stage 2

Stage 1: FCFF1 *PVF (10%, 1) + FCFF2*PVF (10%,2) + FCFF3*PVF(10%,3) + FCFF4*PVF (11%,4) +

FCFF5*PVF (11%,5)

= (-40)*0.909 + 30*0.826 + 60*0.751 + 80*0.659 + 100*0.593

= (-36.36) + 24.78 + 45.06 + 52.72 + 59.3

= 145.5

Stage 2 :

Value of the company at year end 5 = FCFF6/ WACC5 - g

where FCFF6 = FCFF5 (1+g)

= 100 (1+0.025)

= 102.5

therefore, Value at year end 5 (V5) = 102.5/ (0.11-0.025)

= 1205.89

Now, present value of V5 = V5 * PVF(11%, 5)

= 1205.89 * 0.593

= 715.09

Value of the company = Stge 1 + stage 2

= 145.5 + 715.09

= 860.59

Now, calculation of revised intrinsic value per share is as follows :

Particulars Amount ($ Million)
Value of the company 860.59
Less : Value of debt 90
Value of Equity (A) 770.59
Number of Equity Shares (B) 15
Intrinsic value per share 51.37

So, the revised intrinsic value per share = $ 51.37

Earlier it was $ 83.36

Change in intrinsic value = 83.36 - 51.37

=$ 31.99