Question: 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 13% and it has $1,860,000 of debt at market value and $370,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5? years, 2016 through? 2020, are given in the? table, Beyond 2020 to? infinity, the firm expects its free cash flow to grow by 4% annually.
| Year (t) |
Free Cash Flow (FCF) |
| 2016 |
$210,000 |
| 2017 |
$270,000 |
| 2018 |
$320,000 |
| 2019 |
$380,000 |
| 2020 |
$420,000 |
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?