# STOCKS & BONDS

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Barrett Industries invests a large sum of money in R & D; as a result, it retains and reinvests all of its earnings. In other words, Barrett does not pay any dividends and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next four years as follows: \$3 million, \$6 million, \$10 million, and \$15 million. After the fourth year, free cash flow is projected to grow at a constant 7% Barrett's WACC is 12%, its debt and preferred stock total \$60 million, and it has 10 million shares of common stock outstanding. Required: a) Determine Barrett's enterprise value b) Estimate Barrett's price per share of common stock.

• STOCKS & BONDS -

Growth rate after 4 years = 7%
Cash flow for year 5 = \$15,000,000*1.07 = \$16,050,000
WACC = 12%
Value of free cash flows after year 4 at the end of 4 = \$16,050,000 / (0.12-0.07)
= \$16,050,000 / 0.05
= \$321,000,000
Free cash flow for year 4 = \$15,000,000+321,000,000 = \$336,000,000
Year 1 2 3 4
Total free cash flow \$3,000,000 \$6,000,000 \$10,000,000 \$336,000,000
PVIF12% 0.8929 0.7972 0.7118 0.6355
PV of free cash flow \$2,678,571 \$4,783,163 \$7,117,802 \$213,534,074
PV \$228,113,612

Enterprise value = Market capitalization - Cash and equivalents + Debt + Preferred stock
= \$228,113,612 + 60,000,000 = \$288,113,612