Free cash flow valuation
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. 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 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2016 through 2020, are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.
Year (t) Free cash flow (FCFt)
2016 $200,000
2017 250,000
2018 310,000
2019 350,000
2020 390,000
a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.
c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?