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XX Corporation is a fast-growing supplier of office products. Analysts project the following free...

Question:

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier's weighted average cost of capital is WACC = 14%.

Year 1 Year 2 Year 3
Free Cash Flow ($ millions) $20 $30 $40

A) What is the current value of operations for Dozier? Round your answer to two decimal places. Round intermediate calculations to two decimal places.

B) Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Round your answer to the nearest cent. Round intermediate calculations to two decimal places.

Current Value of Future Cash Flows

Free cash flows are the funds that are left after all expenses have been subtracted from the income. Gordon's growth model helps compute the present value of the cash flows in a future time period. A stable model could be used when the cash flows are expected to be growing at a constant rate; a multistage growth model is appropriate when the cash flows vary over a few years and then stabilize. Most companies expect a weighted average cost of capital (WACC) that is the return that is expected out of capital expenditures.

Answer and Explanation:


Question A) Computing the Current Value of Operations


Gordon's growth model offers two formats: the stable model and the multistage growth model.

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