Problem:
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 4 years as follows: $2 million, $5 million, $12 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 5%. Barrett's WACC is 11%, the market value of its debt and preferred stock totals $64 million, and it has 14 million shares of common stock outstanding.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
Requirement:
Question 1: What is the present value of the free cash flows projected during the next 4 years?
Question 2: What is the firm's horizon, or continuing, value?
Question 3: What is the firm's total value today?
Question 4: What is an estimate of Barrett's price per share?
Note: Show all workings.