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Homework answers / question archive / On December 31, 2006, foretasted that Hart Enterprises chould generate free cash flows of $1,500 in 2007 and 2,500 in 2008 and 3,000 in 2009
On December 31, 2006, foretasted that Hart Enterprises chould generate free cash flows of $1,500 in 2007 and 2,500 in 2008 and 3,000 in 2009. Thereafter, free cash flow for Hart Enterprises is expected to grow at an annual rate of 7%. Hart Enterprises has a weighted average cost of capital (WACC) of 10%. Hart Enterprises has Notes Payable and Long-term Debt of $10,000 and no Preferred Stock. Hart Enterprises has 15,000 shares of common stock outstanding.
What is the total value of Hart Enterprises?
What is the value, P0, of a share of Hart Enterprise’s stock?
If Hart Enterprises increases its WACC to 11%, will the value of Hart Enterprises increase or decrease?
1. Terminal value at end of 2009=2010FCF/(WACC-growth rate)
2010FCF=2009 FCF*(1+growth rate)=3000*(1+7%)=3210
Terminal value at end of 2009=3210/(10%-7%)=107,000
total value of Hart Enterprises=(2007 FCF/(1+10%))+(2008 FCF/(1+10%)^2)+((2009 FCF+Terminal value at end of 2009)/(1+10%)^3)
=(1500/1.1)+(2500/1.1^2)+((3000+107,000)/1.1^3)
=1363.6+2066.1+82644.6
=86074.4
2. Value of share, P0=(value of company-Notes Payable and Long-term Debt)/number of shares=(86074.4-10000)/15000=5.07
3. If we increase the discount rate to 11%, the present value of future cashflows decreases resulting in decrease in value of Hart Enterprises
